EUR/USD and USD/CAD 2002-2008: intermarket correlations (symmetric predictive)

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Written by Forex Automaton   
Tuesday, 03 June 2008 14:47

Euro / US Dollar and US Dollar/ Canadian Dollar present another example of symmetrically cross-anticorrelated currency pairs.

Table: Pearson correlation coefficient for the time series of logarithmic returns in EUR/USD and USD/CAD in various trading sessions in 2002-2008.

time scale Asia-Pacific session European session American session
hour -0.38 -0.42 -0.43

EUR/USD and USD/CAD are anticorrelated on average for the period. The anticorrelation is the least pronounced in the Asia-Pacific session.

EUR/USD and USD/CAD intermarket correlation

Fig.1: Cross-correlation of EUR/USD and USD/CAD, derived from the hour-by-hour logarithmic returns, for the three trading sessions.

The fact that most of the anticorrelation is concentrated at the 0 lag bin means that the anticorrelation (reported in the table) works out mostly on the time scale of up to 1 hour. The peak seems to be more than one bin wide, except for perhaps the Asia-Pacific session. In Fig.2, we show statistical significance of the signal.

EUR/USD and USD/CAD intermarket correlation European session

Fig.2: Cross-correlation of EUR/USD and USD/CAD, derived from the hour-by-hour logarithmic returns, for the European (Eurasian) trading session shown against the backdrop of statistical noise (red). The noise is obtained from martingale simulations based on the historical volatilities of EUR/USD and USD/CAD in this particular trading session.

As Fig.2 demonstrates, the main challenge while working with trading session-specific correlations is the non-flat (although quite predictable) behaviour of the noise level with time lag. The symmetry of the peak means that while it is true that a move in EUR/USD foretells an opposite direction move in USD/CAD, it is equally true that an upward or downward move in USD/CAD foretells a downward or upward move in EUR/USD, respectively. (As always on this site, "foretells" should be understood in the statistical sense). The market reaction is not instantaneous. But the width of the peak lets one estimate how much time the markets take to play out their recation: it may take up to a couple of hours for the adjustment to fully finish (not true in the Asia-Pacific session) -- significant signals with two-hour lags are confidently visible in Fig.2.

Data from 2002-08-20 through 2002-02-01 were used in this report.

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