EUR/AUD and EUR/USD 2002-2008: intermarket correlations

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Written by Forex Automaton   
Tuesday, 10 June 2008 13:51

Euro/ Australian Dollar and Euro/ US Dollar are moderately correlated. Correlations with non-zero time lag are seen but they do not look easy to explain.

Table: Pearson correlation coefficient for the time series of logarithmic returns in EUR/AUD and EUR/USD in various trading sessions in 2002-2008. Time frames of the sessions are shown in New York time.

time scale Asia-Pacific session European session American session
hour 0.24 0.32 0.28

EUR/AUD and EUR/USD are moderately correlated on average for the period. Looking at the 0-hour time lag, which is what the table represents, the correlation is the least pronounced in the Asia-Pacific session, most pronounced in the European session.

EUR/AUD and EUR/USD intermarket correlation

Fig.1: Cross-correlation of EUR/AUD and EUR/USD, derived from the hour-by-hour logarithmic returns, for the three trading sessions. Time frames of the sessions are shown in New York time.

The fact that most of the correlation is concentrated at the 0 lag means that the correlation (reported in the table) works out mostlyon the time scale of up to 1 hour. For the purpose of trading system development, correlations with non-zero time lag are of particular importance. Those are usually the least pronounced in the Asia-Pacific session and the most pronounced in the European and to a lesser extent the American session. Here on the contrary the strongest anti-correlation signal in the -1 hour time-lag bin is from the Asia-Pacific session.

To judge how reliable the correlation signals at the non-zero lags are, one has to compare the signal with the noise level obtained from the martingale simulations.

EUR/AUD and EUR/USD intermarket correlation Asia-Pacific session 1 hour bin

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

Fig.2 demonstrates the non-flat behaviour of the noise level with time lag. The noise is at the minimum at 24 times an integer number, its adjacent maxima and minima are offset by 12 hours with respect to each other. This can not be ignored otherwise one risks over-interpreting the picture. The area around zero is relatively safe to interprete since the noise is at the minimum when the lag is at an integer number of days. Based on the level of the noise, the deep in the first bin to the left of the 0 peak looks like a real effect. This means that a move in EUR/AUD is followed by an opposite move in EUR/USD in about an hour. Similar "contrarian" patterns are seen often in the autocorrelations of the currency exchange rates, but here EUR/AUD seems to be giving a contrarian signal on EUR/USD with about an hour delay. It is not clear whether this is a single high-impact incident or a series of less noticeable ones.

The data used are from the period 2002-02-08 00:00:00 to 2008-02-01 00:00:00.

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