2007 Currency Market Correlations Outlines:

Foreign Banks(ECB, RBA, RBNZ, BOC, BOE) were raising Interest Rates because of their Inflation Focused policies.

Inflation - Higher Crude Oil price were leading to higher prices of goods & slowing spending.

Foreign Banks were not lowering Interest Rates because they were not hit that much on Banking/Credit crisis compare to United States. Instead lowering rates, they started lending money through Term Auction Facilities to various Banks.

Due to declining growth in United States, high crude oil price & credit problems, Japan/Asia was having less exports to US which made JPY to rise & carry trades started declining since then.

So, that is why due to Higher Interest Rates in G7 nations & rise in commodities AUD, NZ, EUR were gaining while at same time due to credit problems in USD/ JPY was also gaining. Correlation Coefficient between JPY and other majors at that time was high.
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Swissie has largest exports-imports to EU nations compare to other G7 countries like US, AUD, JPY, so naturally Swissie would follow direction of EURO. US Dollar/Swiss Franc & Euro/US Dollar has >0.95 correlation coefficient.

Britain also got into trouble of Inflation & Credit Crunch immidiately after US sneezzed. Bank of England started lowering interest rate from end of 2007. GBP/USD had high correlation with EUR/USD, AUD/USD, USD/JPY, USD/CHF until end of November 2007. But since BOE officials started talking about lowering interest rates GBP lost correlation since then with other majors.

Canadian Dollar made highest high against US Dollar in first week of November '07. BOC started lowering interst rate from first week of December '07. Since Canadians & Americans both were lowering rates at same time, USD/CAD remained sideways for long time until first week of August '08. US & Canada are biggest exporter/importer to each other.

Australian Dollar started falling big time from end of July '08. Australia is one of the largest exporter of metals to world. As we noticed Gold had failed to make new high in that month. Also, crude oil started declining after $146 high due to big time slow down (less demand) in United States & Britain. Land of Aussies also had somewhat effect on US/Britain Credit Crunch. Less demand of commodities & metals made Aussie Dollar drop big time. Low prices of commodities help somewhat RBA to fight inflation. But due to credit worries AUS was also forced to join Kiwis, Canadians, Americans & Britishers.

EUR/USD exchage rate decline was mainly by two factors: drop in commodities & slowing down in German Businesses. Euro holds 57.6% of US Dollar Index & we know that Gold and US Dollar has inverse connection. So, naturally Euro has to fall with falling price of Gold. Germany factory orders has declined big time since April of this year which also contributed falling price of EURO big time. ECB is still fighting with Credit Crunch & bank problems which started in United States. Trichet in last meeting already mentioned that ECB is not planning to raise interest rate in this year. Therefore traders started betting towards short side of EUR/USD.
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So now what in last quater of 2008 & 2009?
ECB will have to lower interest rate sooner in next meeting or meeting after due to demand of credit expansion in Euro Zone. Banks are still in trouble in United States & having their global effect. Slowing down in consumer spending & businesses in Germany & other EU Nations will make ECB to lower interest rate soon. Right now, EUR/USD is being traded near 1.39. And since we are expecting lowering rate from ECB soon, next stop for EUR/USD are 1.35 & 1.32.

Swissie will follow direction of EUR & Gold since it also has safe haven status due to SNB's gold reserve.

Aussie will depend on rise & fall on prices of commodities. Since ECB will lower interest rate next, Gold & Silver will fall further & it'll make AUD more weaker. On weekly chart, AUD hasn't made lower high yet, but 7% interest rate from 7.25% has already lowered demand of AUD a bit. AUD may fall further if credit expansion demand increases & retail sales, factory orders of metals/commodities declines. Recently RBNZ has lowered interest rate to 7.50% from 8.00% which gives us higher probability that RBA will also soon lower rate speaking from AUD-NZD correlation ratio.

We don't know how many more write downs are coming. And I am already bearish on SPX & Nikkei (less demand of Japanese goods due slow down in United States) which will make JPY only stronger. JPY will test previous lows against USD if it fails to hold current daily time frame channle.

GBP can go only one way due to Banking problems & slowing down in British Pound. It may rise against EUR once ECB reduces interest rate. GBP ain't world's reserve currency, so hypothesis like The Dollar Smile cannot be applied on Cable.

Swissie will follow direction of EUR & Gold since it also has safe haven status due to SNB's gold reserve.

Canadian Dollar is also solid on selling side because of it's heavy exports of commodity products to United States.

I am not expecting for Fed to raise interest rate until banks hit the bottom. So far there are no signs of Financials in United States hitting bottom, not till 2009. But US Dollar will continue strenghning, not because US has solid economy, but rest of world is slowing down.

Note:

• Correlation Coefficient ratio of JPY with EUR, AUD & SWISSIE & GOLD, Oil is <>
• JPY still has strong correlation coefficient ratio with Nikkie, SPX, VIX & TNX.
• GBP & CAD are now somewhat back with a bit strong correlation ration with EUR, SWISSIE & AUD.
• Situation will be different if ECB doesn't lower the rate as expected & some unexpected Geopolitics plays a big role in Crude Oil.