EUR/CHF 2002-2008: Predictability Overview

The Euro / Swiss Franc in 2002-2008 is a currency pair with relatively low volatility. In the medium term (days and weeks), dynamics of EUR/CHF is visibly more random than one would expect on the basis of its long range behaviour — a feature not seen with more volatile currency pairs before.

The interest rate differential has been in favor of the Euro.

The basic autocorrelation

EUR/CHF correlation 1 hour time-lag bin

Fig.1: Autocorrelation of hourly logarithmic returns in EUR/CHF. The time lag is in “business time” (periods without update ticks are excluded). The red band shows the level of noise as iferred from martingale simulations (see text).

As before we employ autocorrelation as a straightforward, inter-disciplinary, non-proprietary technique to test market efficiency in the EUR/CHF market. In Fig.1 we look for features on the time scale of up to two days such as to suit the time scale of day trading or swing trading. The hatched red band shows the range of statistical noise (namely its expectation plus minus its RMS deviation). Statistical noise was obtained by simulating 20 independent time series of the length corresponding to that of the EUR/CHF series, each one constructed to reproduce the measured distribution of returns for the time period under study, but completely devoid of correlations ( martingale time series). From these, the expectation and RMS or the autocorrelation amplitude in each time lag bin were calculated. The one-hour time lag “contrarian” feature (a significant anticorrelation) we saw in this type of plot for other currency pairs involving CHF ( CHF/JPY) and EUR ( EUR/AUD ) is quite strong in the EUR/CHF autocorrelation. The autocorrelation being an average of a product of hourly returns taken with a lag, this negativity means that we are way too frequently (more frequently than in the corresponding martingale time series) taking a product of opposite sign returns for this time lag— or that the product of the opposite sign returns by far outweighs that of the same sign returns for this time lag. Because trend reversals on the time scale of about one hour happen either too often or are too lucrative, EUR/CHF, like EUR/AUD, GBP/JPY, AUD/USD and AUD/JPY analyzed before, may well be the market where winning strategy requires being a contrarian on a short time scale.

EUR/CHF is the currency pair where the martingale simulation “prescribes” an overall positive correlation — a feature which we have not seen pronounced so strongly with other currency pairs in this series of reviews. Its visibility is underscored by the overall relatively low volatility of EUR/CHF with consequently tighter noise range (width of the red band in the figures). The autocorrelation for the lag ranges we have probed is inconsistent with such a “prescription”. Therefore, short range dynamics of EUR/CHF is quite different from what is prescribed by its long term “investment theme”. As always, one should not trade this pair short-range on the basis of long-range considerations alone.

EUR/CHF correlation 4 hour time-lag bin

Fig.2: EUR/CHF autocorrelation as in Fig.1, but with time lag bin increased to 4 hours.

24-hour trading cycle.

EUR/CHF bullish and bearish autocorrelation

Fig.3: EUR/CHF bullish and bearish autocorrelations. Yellow: correlating only positive hourly returns. Blue: correlating only negative hourly returns.

In Fig.3 we construct autocorrelations of the subsamples of the full time series (the “bullish” and “bearish” ones) selected by taking only positive and negative returns respectively. The 24 hour cycle of bullish and bearish action is again clearly seen as the maxima of the correlation are located at multiples of the 24 hour lag: 24, 48, 72, 96, 120 hours and so on. Therefore, smart trend following means something more than following a trend that existed in the near past. It means following a trend that existed this time of the day yesterday, the day before yesterday, and so on — that gives you better than average chance of winning! Conversely, buying because the currency went up 12 hours ago (or selling because it went down 12 hours ago), all the rest being equal, is the least recommended strategy. (See why this 24-hour correlation feature alone is not a prediction strategy. ) Needless to say, this effect is not present in the simulated martingale data.

Note that whether this trend following pattern in all time zones is equally strong is a question that requires a separate study focusing on the best time zones for trend following in EUR/CHF.

EUR/CHF bullish and bearish autocorrelation long range

Fig.4: EUR/CHF bullish and bearish autocorrelations. Axes and color codes as in the previous figure. Range expanded compared to the previous figure to show the characteristic time length of this market memory effect.

Similar patterns have been seen before with most other currency pairs in this series of predictability reviews. It is interesting to note that typically, the “bearish” correlation has higher amplitude whenever the base currency commands a higher interest rate. This has been seen with AUD/USD, AUD/JPY, USD/JPY, GBP/JPY, USD/CAD, (although the interest rate differential has not been that high, it is in favor of USD), AUD/USD, CHF/JPY. In case of EUR/AUD where the interest rate differenctial favors the quote currency, the “bullish” correlation is stronger. These two observations can be summarized in one sentence: the closing of long positions in a high yield currency can be a correlated and thus a relatively predictable process. While in the case of classic carry-trade currency pairs such as AUD/JPY this has been associated with the unwinding of the carry-trade, the underlying mechanism is likely to be similar for other currency pairs. The case of EUR/CHF is unlikely to be an exception, and indeed EUR commands an interest-rate premium with respect to CHF for the period under study.

The fact that one can read the sign of interest rate differential off the public forex quotes via basic correlation analysis indeed goes against the efficient market dogma as it indicates that despite large liquidity such interest rate differentials are not completely discounted by the markets and there remain profit opportunities for algorithmic trading.


The EUR/CHF currency pair has been showing a “contrarian” trend reversal tendency in addition to the trend repetition signal with a 24-hour-multiple time lag seen in most other currency pairs. EUR/CHF is not completely “efficient” from the point of view of basic two-point correlation analysis. Long term prospects of EUR/CHF are the subject of fundamental analysis and are outside the scope of this article. Cross-correlations with other markets are to be discussed in the up-coming articles. In this report we used data for the period from 00:00 2002-08-20 to 00:00 2008-02-01 (New York time).