Correlation is a measure of how two financial assets move in relationship with each other. It ranges from being a 100% positive correlation, which means both financial assets move in unison or a 100% negative correlation which means both financial assets move in exact opposites.
In forex, we can seek out correlations between currency pairs and other financial assets to gain insights into possible undertones.
It is time to review the correlation between the EUR/USD and Gold. In this particular report, we will be zooming out to a longer time frame.
Looking at the GOLD and EUR/USD weekly charts above, we observe a general correlation which strengthens towards the end.
From April 2019 to early Dec 2019, the EUR/USD eases towards the down side ( volatility aside ) while GOLD gains in value. This is indicative of a general period of risk aversion as investors shift funds away from “riskier” assets such as the euro currency and invest on “safer” assets such as the US Dollar and Gold. This is not unexpected considering the geo political challenges during these periods such as Brexit and the US China Trade War.
The period starting mid Dec 2019 till now indicates a strengthening of the correlation. The EUR/USD dipped sharply and that means that the euro currency has lost a sizable amount of value. We see a corresponding sizable gain in the value of gold too. It is important for us to understand the underlying momentum. The Covid-19 Coronavirus has inflicted great economic disruption as Chinese cities are locked down and new fronts of infection break out globally.
As a result of the economic and health implications, risk aversion is swamping the financial markets. We are likely seeing investors shifting away from riskier assets and fortifying instead with US dollars and Gold. This global crisis remains uncertain with no clear end in sight.
If the Covid-19 situation continues to deteriorate, the strong correlation may continue in the weeks to come.