EUR/CHF and EUR/USD 2002-2008: intermarket correlations (leader-follower, strong signal)

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Written by Forex Automaton   
Monday, 09 June 2008 15:43

The correlation between Euro/ Swiss Franc and Euro/ US Dollar exchange rates offers a double surprise: first, it is negative. Second, the "anti-following" of EUR/CHF behind EUR/USD is unusually strong. In cases like that, one could suspect it's one or two extraordinary events that dominate the picture.

Table: Pearson correlation coefficient for the time series of logarithmic returns in EUR/CHF 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 -0.038 -0.12 -0.12

Naively one would expect EUR/CHF and EUR/USD to be positively correlated since the base currency is Euro in both cases. But it seems that the markets regard CHF as an alternative reserve currency and thus in the opposition to the USD. As the table shows, EUR/CHF and EUR/USD are weakly anti-correlated on average for the period. The correlation is the least pronounced in the Asia-Pacific session.

EUR/CHF and EUR/USD intermarket correlation

Fig.1: Cross-correlation of EUR/CHF 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 anti-correlation is concentrated at the 0 lag means that the anti-correlation (reported in the table) works out mostly on the time scale of up to 1 hour. However the reaction of EUR/CHF to a change in EUR/USD and vice versa is not instantaneous, as seen from the finite width of the correlation peak centered at 0. The tail of negative correlation in the area of the positive lags indicate that EUR/CHF lags behind EUR/USD, and the negativity of the correlation amplitude means that EUR/CHF lags behind doing the opposite to EUR/USD. Correlations or anti-correlations with non-zero time lag, such as seen in the figures, are potentially useful for forecasting.

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/CHF and EUR/USD intermarket correlation European session 1 hour bin

Fig.2: Cross-correlation of EUR/CHF and EUR/USD, derived from the hour-by-hour logarithmic returns, for the European (Eurasian) trading session shown against the backdrop of statistical noise (red). The noise is obtained from martingale simulations based on the historical volatilities of EUR/CHF 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 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 bins to the right of the 0 peak looks like a real effect.

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

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