Why Forex Relationships Vary by Frequency and Resist Simple Rules
Summary
The document responds to a request for a quick reference linking currency trends to other markets. Its main lesson is caution: exchange-rate relationships depend on the time horizon, and a compact list of stable pairings may be misleading. At intraday frequencies, the cited research finds order flow and currency-based factors relevant to exchange-rate dynamics. At lower frequencies, the answer says evidence connecting macroeconomic news to exchange-rate movements has been difficult to establish.
The discussion points to research on daily order flows, the US dollar’s safety premium, and empirical exchange-rate models. It notes that proposed currency and commodity connections have been studied, but that predictability is often limited. This is a literature-oriented overview rather than a trading strategy or tested set of correlations. Relationships may differ by currency, sample, and frequency, and the document supplies no current estimates, quantitative results, or operational rules for trading them. Traders should treat the examples as research directions rather than a universal currency-market cheat sheet.
Key ideas
- Currency relationships can differ substantially across intraday and lower-frequency horizons.
- Order flow is highlighted as a relevant measure for intraday exchange-rate dynamics.
- The cited literature has struggled to establish broad, reliable links between macroeconomic news and exchange rates.
- Research addresses topics such as daily order flow and the dollar’s safety premium, but does not yield a universal reference list.
- The answer warns that empirical predictability is limited and does not provide actionable correlation estimates.
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Full text
# Known Forex Market Trends # Known Forex Market Trends As the title implies, is there anywhere I can find (or would anyone be kind enough to make) a [obviously far from comprehensive] list of known connections between a currency’s trends and world markets. For example, something like: CAD — Crude Oil EURO/USD | USD/CHF — Opposite AUD — Gold Where I can sort of have a quick reference to look at when dealing with currencies? ## Answer by phdstudent (score 5, accepted) https://quant.stackexchange.com/a/40187 Exchange rates patterns are very tricky. It often depends on time frequency you are looking at. Let me give you a couple of references: - At high-frequency a good reference is: Fourel, Rime, Sarno, Schmeling and Verdelhan (2015). The first paragraph of that paper answers your question: > At intraday frequencies, no economic variable is known to describe exchange rate dynamics, except for their associated order flows, a quantity-based measure of buyer-initiated and seller- initiated orders. In this paper, we show that common, currency-based factors describe exchange rate dynamics at intraday frequencies at least as well as order flows. - At low frequency, again academics have had little success. From the same paper as above: > Under rational expectations, exchange rates respond to macroeconomic news and instantaneously adjust to the new equilibrium level implied by macroeconomic news. The literature has generally struggled to find hard evidence that this mechanism works. The typical finding is that many news announcements have no perceptible effect on exchange rates. So basically even academics don't know what explains exchange rates. The seminal contribution of Evans and Lyons (2002) documented the strong relation between order flows and daily exchange rates. But that's about where our knowledge stops. There have been some progresses in related areas such as why the US dollar earns a safety premium: Maggiori (2017). A good place to start reviewing the literature is Kenneth Rogoff webpage: https://scholar.harvard.edu/rogoff/publications/filter_by/empirical-exchange-rate-issues Basically, you can find a lot of interesting papers that relate to your question. Unfortunately most of the times you will find that there is not much predictability. A few examples: - Can Exchange Rates Forecast Commodity Prices? - The Failure of Empirical Exchange Rate Models: No Longer New but Still True
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