Dukascopy Market and Economic Research

Greetings to Forex Factory forum members from Dukascopy Research Team!

This particular thread will be mainly devoted to two of our analytical products, namely Market Research and Economic Research, but will not be restricted to them. While both products use quantitative approaches, Market Research is a periodic publication (Mon, Wed and Fri) and is a longitudinal study, in which we review performance of a specific currency according to different in-house developed measures. Economic Research has a different aim and by employing various tools and models tries either to find support for or to refute previously put forward hypotheses that mainly relate to foreign exchange market.

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This thread includes the following Economic Researches:

Rescaled Range Analysis

Optimal Level of Leverage

The Day-Of-The-Week Effect

Safe-Haven Currencies

Commodity Currencies: Canadian Dollar
Commodity Currencies: Australian Dollar
Commodity Currencies: Norwegian Krone

Business Cycle: U.S. Equities
Business Cycle: U.S. Treasury Securities and Currency

Currency Pairs' Returns: Probability and Dependence
Currency Pairs' Returns: Risks

Latest issue of Quarterly Report.
Latest issue of Sentiment Index.
VIDEO version of the Sentiment Index.

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Highlights of the latest Marker Research release on EUR:



Appreciation of the Euro for the last week amounted to 0.34%, making it the best performing currency since Nov 26. Even though for the most part of the time the Japanese Yen appeared to be in demand and the index of the single European currency remained below the base value, the latest events that were mainly associated with increased confidence of the market in United States’ ability to overcome global slowdown encouraged investors to expose themselves to more risk in the face of the Euro. However, such high-beta currencies as CAD, AUD and NZD, did not benefit from the improving sentiment and declined.



Still, regardless of Euro’s recent performance, it stands on a shaky ground. The latest shallow bullish tendency was observed only for several days and there appears to be a lack of fundamental reasons for the currency to maintain upward direction, but the optimism did not yet fade completely, as exhibited by behaviour of market participants.

As pointed out by Mario Draghi in his speech on Nov 30 and demonstrated by the data on unemployment, Eurozone continues to find itself far from an unreserved recovery, which will carry on casting doubts on any emerging rally, even in spite of a seemingly positive outcome of a Eurogroup meeting last Monday, which is more of a relief than a significant shift in the issue of the debt crisis.

Full research available here.

Highlights of the latest Marker Research release on USD.

Full research available here.



Apparently market participants did not feel the need to increase their holdings of quality assets, as the average value of one of the main safe haven currencies, U.S. Dollar, has fallen 0.61% during the last five trading days, implying waning demand for it. In spite of a flurry of negative news, especially on economic health of the Eurozone, such as rising unemployment level and decelerating inflation to name a few, investors seem to trust the skills of the bloc’s finance ministers to veer the union away from an even deeper recession, boosting the amount of riskier bets.



The yet unresolved issue of a “fiscal cliff” that adds to uncertainty regarding recovery of the world’s largest economy also impedes ability of the greenback to gain ground. Since Nov 28 the buck has lost 1.27% against the Euro and 1.52% against the Swedish Krona, while it has softened from 0.12% to 0.5% relatively to the rest of its major peers, making the Dollar the worst performing currency. Even an increasing pace of GDP’s growth failed to cheer up the Dollar, since the positive effect has been negated by contracting manufacturing.Nevertheless, this tendency is unlikely to be sustainable and may be viewed as a temporary deviation from behaviour implied by macroeconomic data, which in turn should overcome optimism in the long term.

Dear traders,

We are glad to offer you our monthly research product - Dukascopy Bank Sentiment Index. In this report, the findings are based on a survey of 30 experts from academia (10 from every region in focus), who are asked to assess the current and future (six-month and three-year) economic prospects of the three regions: Europe, North America and Asia-Pacific.

Major highlights of the recent report:
- The current, six-month and three-year global economic sentiment improved considerably in November from October. Gauges assessing the economic prospects climbed to 0.49, 0.59, and 0.72.
- Respondents became more optimistic about the European economic prospects in November. The current, six-month and three-year economic expectations climbed to 0.27, 0.38, and 0.59, respectively.
- North American economic outlook also improved, a Dukascopy Bank SA poll showed. The current, six-month, and three year economic sentiment indices advanced 0.11, 0.18, and 0.16 to 0.53, 0.67, and 0.76, accordingly.
- Asia-Pacific current and six-month economic outlooks improved 0.11 to 0.66 and 0.71, respectively. The three-year economic outlook climbed to 0.82, up from 0.67 in October.

Previous issues are available here.

Economic Research of Commodity Currencies: Canadian Dollar

The Dukascopy Bank research department is launching a series of research devoted to various traders’ perceptions and general myths that are popular among investors. We start the series with research on commodity currencies (currencies of countries rich in natural resources, with the Canadian, the Australian, and the New Zealand dollars being the most liquid of them), as they are believed to be highly linked to the movements in physical commodity prices.

In this study we will investigate properties of currency pairs containing Canadian dollar, and demonstrate:
1. Whether there is a stable relationship between the Canadian dollar currencies and commodities
2. How strong the link is and what currency pairs are the most impacted
3. Whether the Canadian currency exchange rates and commodity prices are currently linked strong enough to use it in trading
A priori, Canadian Dollar should have a strong bonding with the commodity asset class as Canada exports large quantities of diverse natural resources;
their proportions are shown in Figure 1.



Conclusion



Presently there are several currency-commodity combinations that should be interesting for traders. Energy might be considered in trading CAD/JPY, Industrial Metals – in CAD/AUD. Changes in both commodity sectors are significant for CAD/USD. However, the relationship is changeable, and traders should follow global market tendencies to estimate the link.

Economic Research of Commodity Currencies: Australian Dollar

The Dukascopy Bank research department continues its research on commodity currencies. In the first issue we have established that the relationship between CAD/AUD and commodities is rather strong, yet inverse. That is, the AUD strengthens against the CAD as commodity prices go up, and weakens when they go down. This allows us to expect the AUD exchange rates to be more closely linked with commodity price changes. Therefore we make the Australian dollar the subject of our current research.

Considering the conclusions we made about the Canadian dollar, we have chosen to concentrate on three main questions:
1. How strong is the link between the Australian dollar and commodities?
2. How does the relationship change over time?
3. What is the relationship now?

Findings
First finding: the strength of the relationship with commodities differs among separate AUD currency pairs.
Second finding: The relationship between the Australian dollar exchange rates and commodity sectors is not stable over time.
Third finding: currently the link between the Australian dollar and commodity sectors is notably strong, with correlations at their historic highs.

Conclusion
At the moment there are five currency pair – commodity combinations that have a stably strong relationship since 2011:



Changes in Energy and Industrial Metals are significant for AUD/USD and AUD/JPY. Industrial Metals sector might be considered in trading AUD/CAD. However, the relationship is changeable, and traders should follow global market tendencies to estimate the link.

Economic Research of Commodity Currencies: Norwegian Krone

The Dukascopy Bank research department presents the final part of its research on commodity currencies. In the current issue we consider commodity sectors’ influence on Norwegian krone exchange rates. Norway is the second largest non-OPEC oil exporter, and energy products make up more than 50% of its exports. It gives us an opportunity to establish whether the exports’ share can be named as one of the relationship-defining factors.

Considering this new idea and the conclusions we have drawn from our previous research, we will examine the following questions:
1. How strong is the link between the Norwegian krone and commodities?
2. Which commodity sectors have the most influence on the exchange rates?
3. What is the relationship now?

Findings
First finding: commodities’ relationship with NOK is weaker than with the Australian dollar, but stronger than with the Canadian.
Second finding: the Energy and the Industrial Metals’ sectors give the best correlations with NOK exchange rates.
Third finding: In the beginning of 2012 the best correlations for Norwegian krone are stably over 0.5.

Conclusion
At the moment there are five currency pairs – commodity combinations that have a stably strong relationship since 2011:



Changes in price on Industrial Metals are significant for NOK/USD and NOK/JPY. The energy sector might be considered in trading NOK/USD, NOK/JPY, and NOK/CHF. However, the relationship is changeable, and traders should follow global market tendencies to estimate the link.

The aim of this research was to establish whether there is a link between commodities and so-called commodity currencies. We have examined three currencies and concluded that each of them is to some degree related to certain commodity sectors. The strength of the link changes in time, and cur-rently all currencies are in a period of close relationship with commodities. The most impacted currency is the Australian dollar. The Norwegian krone is second-best. The weakest but still mostly significant relationship is between commodities and the Canadian dollar.

Economic Research of Business Cycle: U.S. Equities

The Dukascopy Bank research department presents the first part of the research on assets performance within a business cycle. The research gives investors an opportunity to estimate the behaviour of several asset classes under changing economic conditions.

The main question of the research is: how do assets perform across a business cycle?
This study is dedicated to the equity asset class in the U.S., and in particular its sensitivity to different economic regimes.

Results
1. Economic periods marked in accordance with the composite index correspond to the economic cycles estimated by the National Bureau of Economic Research.
2. All stock indices clump during slowdown periods and show strong performance in recessions.
3. Recession is a period of maximum volatility, whilst expansion is the calmest part of the cycle.
4. The correlations between stocks increase on the back of a worsening economy and slightly decrease as economic conditions improve.



Conclusion
Summarising the results above, economic regimes have an influence on stock performance. During expansion, a period of fast economic development, stocks tend to have moderate returns, low volatility and weak correlations. This makes the regime a good time to invest in stocks. As far as recession is concerned, high returns, elevated volatility, and strong correlations are expected. Therefore this period potentially is more profitable for short-term speculation, but risk management becomes the top priority.

Economic Research of Business Cycle: U.S. Treasury Securities and Currency

The Dukascopy Bank research department continues the study of asset performance across a business cycle. The research focuses on asset dynamics under changing economic conditions and its meaning for an investor.

The current issue covers the performance of U.S. Treasury securities and the U.S. dollar.

Results
1. Profitability of government debt securities and national currency changes throughout an economic cycle.



2. Recession is the period of greatest volatility, while the most stable periods vary over asset classes.
3. T-Notes and T-Bonds are the only assets with stable strong correlation.

Conclusion
Analysing the U.S. indices and securities, we have established that changes in economic conditions do have an impact on financial assets.
Government debt securities seem to go in parallel with the business cycle. Returns and volatilities show that Treasuries are most profitable and stable during an economic upturn, and most unprofitable and volatile in recessions. National currency, on the other hand, performs differently. It makes a recession the period of both greatest returns and greatest volatility, while its lowest returns and smallest fluctuations occur during slowdowns.
U.S. equities, which were covered in the previous issue, have yet another type of performance, sharing some characteristics with bonds and others with currency. Overall results for asset returns and volatility throughout an economic cycle are given in Table 6:



All in all, it seems that expansion might be a good time to invest in bonds. Meanwhile, stocks and national currency tend to be stable and not unprofitable, so one should not be overly concerned with having them in a portfolio. A slowdown is a generally disadvantageous period for stocks and bonds in terms of both risk and profit. Currency, at the same time, is expected to be stably weakening, which makes playing against it an option worth considering. A recession is the worst time to invest in bonds and the most risky, but potentially the most profitable period for stocks and currency. During a recovery volatilities are still high, but returns are either moderately positive or feebly negative. Stocks seem to be the most promising asset in this period, but higher than average volatility still marks it as unstable.

Economic Research of Currency Pairs' Returns: Probability and Dependence

The Dukascopy Bank SA research department starts a series of research on statistical properties of currency pair returns. In several issues we will investigate different characteristics to answer two main questions. Firstly, can we confirm or refute general assumptions about the nature of returns? And secondly, how do our findings affect the real-life use of the theory?

In the current issue we focus on the relation between past and present returns and address subjects of distribution and dependency. Associated concepts, such as normality and independence, are crucial for models in risk analysis, prediction making, etc. That is why it is important to know whether the necessary assumptions hold, and therefore be able to estimate the accuracy of methods used in investing and trading.

We have chosen to study four pairs, trying to involve both popular and diverse currency couples: EUR/USD, EUR/GBP, EUR/JPY, and USD/CAD.

Results
1. In general, logarithmic returns of the currency pairs are not normally distributed.
2. Currency pair returns are not always independent from their earlier selves.



3. Distributions of returns are asymmetric and heavy-tailed.

Conclusion
We have investigated currency pair logarithmic returns, looking for patterns or laws that would describe price movements. The study showed that, in general, the returns are independent, heavy-tailed and skewed towards negative values. Thus the exchange rates move chaotically on a small time scale and often exhibit losses greater than gains. The returns also proved to have zero mean and infinite variance. All these prop-erties result in the inaccuracy of normality-assuming models and consequently underestimation of risk, as strongly negative values appear more frequently than expected. Some samples, however, did demonstrate normality, proving that the properties of returns tend to vary for dif-ferent time intervals and for different currency pairs. Thereby preliminary data testing is important, as some datasets are fitting for popular fi-nancial methods, but others require application of more complex and general models.

We have invited Brian M. Lucey, Professor of Finance at Trinity College Dublin, for a live webinar at 12:00 GMT to have a look at precious metals with a focus on gold. Join us as well and learn what academia experts think!

Link to the webinar.

Highlights of the latest Market Research on CHF:

Full research available here.



A rare since September 2011 phenomenon that relates to interaction between the Swiss Franc and Euro was observed during the last five trading days. For a brief moment values of these two currencies became less interdependent, as EUR/CHF retreated from a cap of 1.20 and peaked at 1.2169 on Dec 5 amid largely groundless but still ubiquitous in the market rally of the single currency. Eventually, hopefulness with respect to the Eurozone was impaired, as demonstrated by poor performance of the EUR in the second part of the week, resulting in a 0.26% depreciation on average relatively to its major peers, spillover effect of which impacted the Franc as well.



Until Dec 6 the Euro seemed to be quite resilient to negative news and remained buoyant despite increasing unemployment rate and falling volume of retail sales in the bloc. Accordingly, CHF too was stable, but took a hit together with the Euro on Thursday once the ECB president reiterated his dovish outlook. As a consequence, the swissie lost 0.61% of its worth just within a few hours after the press conference, while for the whole week debasement amounted to 0.71%.The main contributor to Franc’s softness proved to be the New Zealand Dollar, as the Reserve Bank refused to ease monetary policy and cut the policy rate, forcing NZD-short investors to adjust their positions across the board, thus lifting NZD/CHF up by 1.6% since Nov 30.

Highlights of the latest Market Research on EUR:

Full research available here.



Resilience of the common European currency was overpowered by a flow of negative on the state of the Eurozone economy news that soured sentiment and brought value of the Euro down by 0.8% in the course of the last week. While the main drag on was a bleak outlook of the European Central Bank on the bloc, resulting in a 0.65% dip in four hours, falling retail sales and contracting volume of industrial production in Germany added to the sell off and did not let bulls to recollect themselves until the weekend. The Swiss Franc was impaired even more, losing more than 1% of its worth on average.



A sharp decline in Euro’s index was not only due to diminishing demand for the currency itself, but also because of growing amount of reasons to acquire alternatives, such as commodity currencies. The effect was particularly strong for the New Zealand Dollar—a surge of 1.88%, which emerged amid unwillingness of the country’s central bank to jump on the bandwagon of loose monetary policy. On the other hand, RBA’s decision to lower the policy rate muted the effect, allowing AUD to appreciate by 0.83% since Dec 3. Direction of the Euro this week will be largely decided by the European Economic Summit, but it is noteworthy to say that the mood of market participants is quite depressed at the moment, especially towards the Euro, imposing significant barriers to the upside potential.

In case you have missed the live webinar with Pr. Brian M. Lucey from Trinity College Dublin on Precious Metals, here is the link to a recorded session.

Highlights of the latest Market Research on USD:

Full research available here.



Last week resurfacing Eurozone problems, brought to light by the most recent data on contracting bloc’s retail sales and languishing German industrial production, allowed the U.S. Dollar, being a safe haven currency, to benefit from the increasing flow to quality assets. Appreciation of the greenback at the expense of the Euro was also reinforced by a more dovish than previously stance of the ECB, members of which are becoming increasingly skewed towards a lower policy rate. However, following eventless and calm Monday there is virtually nothing left of the buck’s rally at the moment, as gains were pared amid substantially improved economic sentiment in the monetary union.



Data on the U.S. economy, on the other hand, only fortifies conviction that there are seemingly no dangers to a recovery and no reasons for any additional stimulus. One of the main goals of the Federal Reserve, specifically low unemployment rate, is gradually materialising, while the overall price level remains stable, which in turn enables the central bank not to stop there and continue success, since the desired level of employment is yet to be achieved. Moreover, a risk of an external shock, a threat that mainly emanates from the Eurozone, is still palpable. Such a possibility appears to be factored in by the market that anticipates supplementary injections of money into the system, which is still perceived to be quite brittle, resulting in a cheaper Dollar in the end.

Highlights of the latest Market Research on GBP:

Full research available here.



Propensity of the average correlation coefficient to increase reinforces our view that the Sterling is starting to occupy a more significant position in the market and is exhibiting more influence on its major peers. The coefficient has already risen from 0.13 to 0.36 and has not yet reached its limit, as both means and medians of samples of 50-hour rolling correlation samples for a 130-day period are materially higher than the same statistics of smaller and more recent samples—for the last 5 and 20 days.



During the ending of the last week and the beginning of the current one many of the correlations between GBP crosses were negative, but are gradually becoming positive, even though they are still rather weak at the moment. A few exceptions are linkages of EUR/USD with GBP/CHF and GBP/SEK that stay strong and unsusceptible to changes despite the shift in the context of the market. While co-movement of the latter pair (GBP/USD and GBP/SEK) is observed in 55% of cases, GBP/USD and GBP/CHF are unidirectional 91% of the time, making presence of these two combinations in a portfolio undesirable, as potential benefits of diversification are lost in that case.

Full research available here.

Highlights of the latest Market Research on EUR:



The single European currency has outperformed all of its major peers over the past week, on average rising by 1.62% across the board. With each new day the currency has been adding to gains regardless of the news published, as observed on Monday and Wednesday, when investor confidence and industrial production, respectively, in the bloc declined, but the Euro continued to increase in price despite apparently unfavourable data. Positive readings on manufacturing and services PMIs later on in turn accelerated appreciation of the EUR, while the outcome of the meeting of European leaders is deemed to be successful as well.



While Greece remains in relative safety and there are periodic reminders that some parts of the monetary union are still normally functioning and even improving (PMIs), the common currency is poised for a rally, even though GDP growth forecast for the next year has been lowered, which implies that previously held beliefs with respect to recovery of the Eurozone were overconfident and thus it should keep us wary of fragility of the up-trend we are currently observing.
Moreover, it may seem as if investors are now more confident and risk-seeking, whereas the sentiment is largely unchanged, but there are new variables added to the equation represented by the additional easing by the Fed and primarily the probable change of the approach to governing the Bank of Japan.

Today E.I.I. Capital Group joins the Dukascopy Community TV at 15:00 GMT to discuss how to apply Ichimoku Clouds to trade specifically Forex. During the webinar you will see how to use the technical indicator on a live platform and how it works with your preferred currency pair as well as time frame.
More info is available here.

Full research available here.

Highlights of the latest Market Research on USD:



The value of the U.S. Dollar largely remained stable throughout the last five trading days, as its currency index lost only 0.39%. Even the statement of the Federal Open Market Committee did not introduce any notable changes on Dec 12, meaning that action of the U.S. central bank did not anyhow surprise the market and thus was widely anticipated. On the other hand, news outside the United States, such as Eurozone industrial production, U.K inflation and parliamentary elections in Japan, elicited an even weaker response from the greenback, which thereby appears to be isolated from external influence.



The only data that managed to weigh on the Dollar was consumer price index, decrease of which may unleash additional stimulus, since the Fed has one less issue to be concerned about. Furthermore, it is actually likely to prompt a looser monetary policy than it is at the moment, as Japan’s struggle with deflation is a prominent example how dangerous deflation may be to health of the economy.
The only two major currencies the U.S. Dollar outperformed were the Japanese Yen and Australian Dollar that retreated 2.14 and 0.17 per cent relatively to it, respectively. The reason of such results primarily lies in victory of the party in Japan that favours more decisive actions in order to rekindle economic activity in the country, using every available tool.

Full research available here.

Highlights of the latest Market Research on JPY:



Losing streak of the Japanese Yen continues. This time the currency has depreciated 1.34% during the last five days, since Dec 14. However, Yen’s debasement was more tepid than one would expect bearing in mind words of Shinzo Abe, the leader of the Liberal Democratic Party, who advocates unlimited asset purchases and has convinced the market that changes associated with such approach will be implemented as soon as possible. A 1.27% move of the currency index on Friday demonstrated anticipation of more easing associated with Abe’s party victory, though subsequent behaviour was not univocal and some JPY crosses underwent notable corrections.



Not only the Japanese Yen slowed its pace of depreciation, it has even increased in value relatively to the kiwi, since a continuous flow of negative data related to the Asia and Pacific overall and New Zealand in particular leaves a negative impression of the well-being of the region’s economy. All of the other studied currencies, on the other hand, stepped higher at the expense of the Yen. The gains varied from 0.42% by the Australian Dollar to 3.25% by the Swedish Krona. The latter was pushed upwards despite the Riksbank lowering the key interest rate, as Sweden central bank’s unwillingness to carry on with cuts in the future was explicit and triggered a short squeeze.