AUD/JPY intraday seasonality overview, 2003-2010

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Written by Forex Automaton   
Tuesday, 14 December 2010 17:51
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AUD/JPY intraday seasonality overview, 2003-2010
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This report continues a new series of reports about intra-day "seasonality" effects in FX. Like in EUR/USD, the hourly movements in AUD/JPY do not precisely average to zero for every hour of the day. Moreover, there appears to be a statistically preferred time to bet on a trend reversal in AUD/JPY. Evidence for that comes from the comparison of temporal distribution of daily extremes with temporal distribution of volatility, and from autocorrelations of logarithmic returns with 1-hour lag.

As always, the quantities we are going to look at are not the actual low, high and close. Since prices are always positive, they are trivially correlated; this feature is absent in the correlations of the so-called logarithmic returns (or logarithmic increments) which are the ratios of price levels (low, high, close) to the values they had during the previous hour-long time interval.

Central Europen time is chosen for the following reason. Forex week begins, roughly speaking (since the volume increase is gradual) on Sunday 5pm and ends Friday 6pm Eastern time. It is convenient to define this week to consist of 5 full days, from 6pm Sunday to 6pm Friday New York time. When it's 6pm in New York, it's midnight in Berlin, Paris, Madrid, Rome, Geneva and Frankfurt. These cities use Central European Time or CET. Therefore, the convenience of using CET is that one gets 5 non-interrupted, full 24-hour long trading days per week. Table 1 compares four time zones including major trading centers of the world.

Tokyo 9 1011 1213 14 15 16 17 18 19 20 21 2223 0 1 2 3 4 5 6 7 8
Central Europe 123456789101112 13141516171819202122230
Greenwich 01234567891011 121314151617181920212223
Eastern US 19202122230123456 789101112131415161718

Table 1. Time zone conversion table. Seasonal time shifts, such as daylight saving time, may complicate the picture if the nations choose to enact them on different days, and are ignored.

To look for seasonality effects in first-order statistics (averages), we average logarithmic returns for each hour of the day separately using profile histograms. The resulting histograms are plotted in Fig.1.

AUD/JPY averaged log return vs CET hour of the day, in 2003, 2004, 2005, 2006 1.1 AUD/JPY averaged log return vs CET hour of the day, in 2007, 2008, 2009, 2010 1.2 AUD/JPY averaged log return vs CET hour of the day, in 2003-2010. All yeards aggregated. 1.3 AUD/JPY averaged log return vs CET hour of the day, in 2003-2010. Coherent end-of-day pattern. 1.4

Fig.1. Averaged logarithmic return vs hour of the day in CE time for AUD/JPY. 1.1: Years 2003, 2004, 2005, 2006. 1.2: Years 2007, 2008, 2009, 2010. 1.3: All years added. Vertical bars show precision of the mean. 1.4: End-of-day pattern looks coherent for many years.

Fig.1 presents hourly "seasonal" averages of the hourly logarithmic return in AUD/JPY.

With the present level of interest rates AUD/JPY remains a carry trade pair, theoretically allowing the owner to enjoy "free lunch". The carry trade works by borrowing JPY cheaply and exchanging it on the market for AUD, then reaping the higher interest yield in AUD. The yield on the trade is the interest rate differential combined with the change in the exchange rate while the trade is on. Financial engineering postulates "no free lunch" leaving the question open as to the mechanism and the time scale of the "enforcement" of this principle. Had the AUD/JPY exchange rate returns averaged to a negative number, that would have served as a mechanism to disable carry trade "on average" for such a period of observation, enforcing the postulate. For the data set under study, that is not the case: the average hourly logarithmic return is positive although consistent with zero given its measurement error.

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