AUD/USD and CHF/JPY 2002-2008: intermarket correlations

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Written by Forex Automaton   
Friday, 20 June 2008 10:58

Australian Dollar/US Dollar and Swiss Franc/Japanese Yen are weakly correlated currency pairs. For the period under study, the correlation is limited to the 1-hour wide 0 time-lag bin and therefore offers little value to the forecaster. In this regard, this pair of exchange rates resembles AUD/USD and GBP/JPY.

Table: Pearson correlation coefficient for the time series of logarithmic returns in AUD/USD and CHF/JPY 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 0.21 0.29 0.28

AUD/USD and CHF/JPY are weakly 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 American session, most pronounced in the European session.

AUD/USD and CHF/JPY intermarket correlation 1 hour time-lag bin

Fig.1:Cross-correlation of AUD/USD and CHF/JPY, 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 mostly on the time scale of up to 1 hour. For the purpose of trading system development, correlations with non-zero time lag would be of particular importance. It is these correlations that allow us to make forecasts. Alas, Fig.1 and Fig.2 (European session compared with martingale noise) present no indication of such correlations for this currency pair combination, given the level of uncertainty represented by the red band.

AUD/USD and CHF/JPY intermarket correlation 1 hour time-lag bin with uncertainty estimate

Fig.2:Cross-correlation of AUD/USD and CHF/JPY for the European (Eurasian) trading session shown against the backdrop of statistical noise (red). The noise is obtained from martingale simulations based on the recorded volatilities of AUD/USD and CHF/JPY in this trading session for the period under study. The noise is presented as mean plus-minus 1 RMS, where RMS characterizes the distribution of the correlation value obtained for each particular bin by analyzing 20 independent simulated pairs of uncorrelated time series.

The data used are from the period 2002-08-20 00:00:00 to 2008-02-01 00:00:00.

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