Australian Dollar/Japanese Yen and Euro/US Dollar are weekly correlated. A positive correlation tail with time lags up to 3 hours is seen indicating that EUR/USD tends to lag behind AUD/JPY.
|time scale||Asia-Pacific session||European session||American session|
AUD/JPY and EUR/USD are weakly correlated on average for the period. The correlation is the least pronounced in the American session, most pronounced in the Asia-Pacific session.
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. The tail of positive correlation to the left of the 0 lag indicates that there is a “tail” of predictable action in EUR/USD lagging behind AUD/JPY. It is the strongest in the European and American sessions. Even though the Asia-Pacific session has the strongest correlation between the two currency pairs within the 0-lag time bin (see the table), it has the weakest correlation away from 0 and thus must be the worst for forecasting on the basis of this correlation feature.
To judge how reliable the correlation signal at the non-zero lags is, one has to compare the signal with the noise level obtained from the martingale simulations.
Fig.2 demonstrates the non-flat (although quite predictable) behaviour of the noise level with time lag. 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. Based on the level of the noise, the tail in the first couple of bins to the left of the 0 peak (which means EUR/USD is trailing AUD/JPY) looks like a real effect. We are probably looking at the “risk aversion”/”risk appetite” mood swings where the AUD/JPY having a very strong interest rate differential can indeed lead the show.