Copper remains the primary driver of high-frequency FX movements, with US equities and rates ranking as the second and third most influential factors, respectively. While the number of currencies currently being driven by US equities has declined compared to last week, US equities have still influenced FX on more days than any other driver over the past three months, particularly evident in pairs like USD/CHF and AUD/JPY. For those anticipating a risk-off environment as the year concludes, buying one-month AUD/JPY volatility offers an effective hedge against such moves.
Meanwhile, copper serves as the primary driver for commodity currencies, including AUD/USD and NZD/USD. Over the past three months, its influence has also extended to movements in USD/ZAR and EUR/NOK. Concurrently, a moderate correlation is observed between copper and gold, as well as with the Antipodean currencies, USD/ZAR, and USD/MXN.
Digging deeper into specific pairs:
- EUR/USD: Driven by EU equities and Copper.
- USD/JPY: Movements primarily driven by US equities.
- GBP/USD: Influenced by UK equities, UK rates, and Copper.
- EUR/PLN: Driven by EU equities, EU rates, Copper, and EM equities.
Based on correlation-based Minimum Spanning Trees, EM equities consistently stand out as the dominant contemporaneous driver of high-frequency FX movements, with VIX and US rates emerging as significant secondary drivers.
Figures 1, 3, and 13 examine causality in FX, showing which currencies can be statistically predicted by other asset classes, ranking the drivers of FX by the number of currencies influenced, and illustrating the relative importance of each asset in driving a given currency, respectively. Figure 11 highlights the top 3 correlations between FX pairs and other asset classes, while Figure 12 shows intra-FX correlations. Granger causality tests are used to measure causality, with all statistics measured at a 5-minute frequency.
Daily correlations are computed using log price changes sampled at 5-minute frequency and averaged over the past five days to arrive at the final 5-day correlation numbers.
Figure 14 indicates that EM equities and AUD/USD are the most important focal points based on correlation.
