High-frequency cross-asset drivers of foreign exchange: US equities remain the main high-frequency FX driver as rates and oil gain influence
Deutsche Bank finds that US equity moves continue to drive the broadest range of currencies, while the influence of US rates nearly doubled over two weeks amid rising yields and oil also became more important.
Summary
Deutsche Bank finds that US equity moves continue to drive the broadest range of currencies, while the influence of US rates nearly doubled over two weeks amid rising yields and oil also became more important.
- US equities influenced many currency pairs on around 90% of trading days over the past three months.
- Connectivity from US rates to FX almost doubled versus two weeks earlier.
- AUD/USD, USD/ZAR and EUR/NOK were the pairs most sensitive to cross-asset dynamics over the latest four weeks.
- Correlations between several FX pairs and EM equities rose by an average of 70%.
Report Interpretation
Overview
This FX Blog examines which cross-asset markets are driving currency moves at five-minute frequency. Deutsche Bank identifies US equities as the dominant broad influence, with rising US yields and oil becoming more important short-term drivers.
Core views
Deutsche Bank's latest causality tests show that the cross-asset influence of US rates on FX strengthened sharply as US yields rose: the number of rate-to-FX connections almost doubled from two weeks earlier. Oil also became a significantly more important FX driver. Even so, US equities remained the dominant force behind high-frequency currency moves. The report adds that US equities' outperformance against other developed markets during the month could contribute to month-end dollar weakness through portfolio-rebalancing flows. The most cross-asset-sensitive pairs in the latest period were AUD/USD, USD/ZAR and EUR/NOK, with commodity-linked drivers gaining prominence over the preceding fortnight. Among major pairs, US equities, US rates and oil were the principal drivers of USD/JPY, EUR/USD, NZD/USD, USD/MXN, USD/SGD and USD/CNH. US equities were the main influence on USD/CHF, USD/TRY and XBT/USD, while GBP/USD and USD/CAD reflected a combination of US equity and US-rate developments. Over the past three months, US equities affected many currency pairs on around 90% of trading days. USD/CHF, USD/JPY and the commodity currencies USD/CAD, AUD/USD and NZD/USD were especially sensitive to US equity movements. Deutsche Bank therefore notes that a US-equity-led risk-off episode would likely raise NZD/USD volatility; its FX Blueprint indicates that implied volatility in NZD/USD screens as cheap relative to fair value. The report also identifies a broad rise in equity-market linkage. GBP/USD, AUD/USD, NZD/USD, USD/SGD, USD/MXN and USD/ZAR showed a notable increase in correlation with EM equities, averaging a 70% rise. US rates had strong correlations with EUR/USD, USD/JPY, USD/CHF, EUR/CHF, USD/CNH and XAU/USD. Commodity relationships remained important: oil was highly correlated with EUR/NOK, while copper was highly correlated with USD/CAD. VIX was strongly correlated with EUR/SEK, AUD/JPY and XBT/USD, highlighting the continued role of general risk sentiment. The longer-run analysis reinforces the differing cross-asset sensitivities across pairs. USD/CHF was driven by US equities on 90% of days since April 2021, EUR/NOK showed an 80% oil-driven reading, EUR/SEK a 72% copper-driven reading, and AUD/JPY a 96% reading for Australian equities. The report also highlights EUR/SEK and USD/CNH as the currencies most driven by US rates over the past three months; USD/CHF and USD/CNH as most driven by US equities; EUR/SEK and EUR/PLN as most driven by copper; and EUR/NOK as most driven by oil.
Analysis framework
The report combines five-minute market data with Granger-causality tests to identify assets whose moves statistically help predict individual currency moves. It ranks the number of currencies driven by each asset, measures each asset's importance for a given currency over recent periods, and supplements causality results with five-day averages of daily cross-asset correlations.
Methodology notes
Granger causality tests
The tests assess whether prior moves in an asset class contain statistical information that helps predict subsequent moves in an FX pair; Deutsche Bank uses them at five-minute frequency to map directional cross-asset connections.
Cross-asset correlation analysis
The report calculates daily correlations from five-minute log-price changes and averages them over five days to show the strength and recent change in contemporaneous relationships between FX pairs and other markets.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- AUD/USDOne of the FX pairs most sensitive to cross-asset dynamics; linked to EM equities, US equities and US rates.
- Strengths
- High recent cross-asset connectivity.
- Comparison
- Along with USD/ZAR and EUR/NOK, it was among the most sensitive pairs.
- Risks
- Sensitivity to changes in equity and rate-market conditions.
- USD/ZARHighly sensitive to cross-asset dynamics and strongly linked to EM equities.
- Strengths
- High recent cross-asset connectivity.
- Comparison
- Along with AUD/USD and EUR/NOK, it was among the most sensitive pairs.
- Risks
- Sensitivity to broader EM-equity and cross-asset risk conditions.
- EUR/NOKA highly cross-asset-sensitive pair with a prominent oil relationship.
- Strengths
- Oil was its most important long-run driver.
- Comparison
- The report identifies EUR/NOK as most driven by oil over the past three months.
- Risks
- Sensitivity to oil-market developments.
- NZD/USDDriven by US equities, US rates and oil in the recent period.
- Comparison
- Particularly sensitive to US equity moves over the past three months.
- Risks
- A US-equity-led risk-off episode would likely increase volatility.
Key data
- US equity influence on FXAround 90% of trading days over the past three monthsUS equities influenced many currency pairs and remained the dominant high-frequency FX driver.
- US-rate-to-FX connectivityAlmost doubledCompared with two weeks earlier as US yields rose.
- EM-equity correlation increaseAverage 70%Rise in correlations for GBP/USD, AUD/USD, NZD/USD, USD/SGD, USD/MXN and USD/ZAR.
- USD/CHF driven by US equities90% of daysLong-run reading since 1 April 2021.
- EUR/NOK driven by oil80% of daysLong-run reading since 1 April 2021.
- AUD/JPY driven by Australian equities96% of daysLong-run reading since 1 April 2021.
Impact & implications
The report indicates that high-frequency FX risk is currently shaped primarily by US equity moves, with a stronger transmission from US rates and commodities than in the prior fortnight. Sensitivity varies materially by currency pair, making risk sentiment, yield moves, oil and copper particularly relevant cross-asset signals for the identified pairs.
Risks
- A US-equity-led risk-off episode would likely push NZD/USD volatility higher.
- FX pairs remain vulnerable to shifts in equity, rate, commodity and broader risk-sentiment conditions.