Wednesday, August 31, 2011

DIY - Calculating Currency Correlations using Excel

Woman in front of computer
As you've read, correlations will shift and change over time. So keeping on top of current coefficient strengths and direction becomes even more important.

Lucky for you, currency correlations can be calculated in the comfort of your own home, just you and your most favorite spreadsheet application.

For our explanation, we're using Microsoft Excel, but any software that utilizes a correlation formula will work.
    Get closing prices of last 6 months
  1. We're assuming that you won't be magically creating the daily price data out of thin air, but rather, will be getting it somewhere online. So, Step 1, do that! Obtain your data, say, for the last 6 months. Remember, you want data containing daily closing prices.
  2. Open Excel.
  3. Copy and paste your data to an empty spreadsheet or open the exported data file from Step 1. Get the last 6 months!
  4. Now arrange your data to look like the following or something similar. Colors and fonts are up to you! Have fun with this. Yellow might not be the best option though!
  5. Design it to your preference
  6. It's time to decide on a time frame. Do you want last week's correlation? Last month? Last year? The amount of price data you have will dictate this, but you can always get more data. For this example, we're using the last month.
  7. Choose your time frame
  8. In the first empty cell below your first comparison pair (I'm correlating EUR/USD to the other pairs, so I'm starting with EUR/USD and USD/JPY), type: =correl(
  9. =correl(
  10. Next, select the range of cells for EUR/USD's price data, followed by a comma. You'll be surrounding this range with a box.
  11. Select the range of cells
  12. After the comma, select USD/JPY's price data range just like you did for EUR/USD.
  13. Select the range of cells of the other pair
  14. Click the Enter key on your keyboard to calculate the correlation coefficient for EUR/USD and USD/JPY.
  15. Calculate the correlation coefficient
  16. Repeat Steps 5-9 for the other pairs and for other time frames. When you're done, you can take your new data and create a cool looking table just like this. Man, that's pro-status!
  17. Repeat Steps 5-9 for other pairs and time frames

The one-week, one-month, three-month, six-month, and one-year trailing periods provides the most complete view of the correlations between currency pairs. But it's up to you to decide which or how many time periods you want wish to analyze.

While it might be overkill to up¬date your numbers every single day, unless you're a currency correlation addict, updating them at least every other week should be enough.
If you find yourself manually updating your correlation tables every hour on Excel, you might need to get out more and pick up a hobby.

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