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

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Written by Forex Automaton   
Wednesday, 18 June 2008 07:15

Australian Dollar/US Dollar and Pound Sterling/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.

Table: Pearson correlation coefficient for the time series of logarithmic returns in AUD/USD and GBP/JPY in various trading sessions in 2002-2008. Time frames of the sessions are sho wn in New York time.

time scale Asia-Pacific session European session American session
hour 0.17 0.18 0.16

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

Fig.1: Cross-correlation of AUD/USD and GBP/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 (repo rted in the table) works out mostlyon 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 suc h correlations.

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

Fig.2: Cross-correlation of AUD/USD and GBP/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 GBP/JPY in this trading session for th e period under study.

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

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