AUD/USD and GBP/USD 2002-2008: intermarket correlations (leader-follower)

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Written by Forex Automaton   
Thursday, 19 June 2008 15:50

Australian Dollar/US Dollar and Pound Sterling/US Dollar are symmetrically cross-correlated 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 0.44 0.52 0.53

AUD/USD and GBP/USD are correlated on average for the period. As often is the case, the correlation is the least pronounced in the Asia-Pacific session.

AUD/USD and GBP/USD intermarket correlation

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

The fact that most of the correlation 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, especially for the European and American trading sessions. In Fig.2, we show statistical significance of the signal.

AUD/USD and GBP/USD intermarket correlation European session

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

Fig.2 demonstrates the non-flat (although quite predictable) behaviour of the noise level with time lag, caused by the constraint on the time lags associated with the definition of the trading session time window. This can not be ignored otherwise one risks over-interpreting the picture. The area around zero is fairly safe since the noise is at the minimum when the lag is at an integer number of days. The symmetry of the peak means that while it is true that a price movement in AUD/USD foretells a movement in the same direction in GBP/USD, it is equally true that an upward or downward movement in GBP/USD foretells a downward or upward movement in AUD/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 -- 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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