Time Decomposition of FX prices

In this method, I investigate the behaviour of prices in off-market hours - if they have a consistent drift, and whether it could be used as a trading strategy.

The currency pair I've chosen to start with is the USDCAD as both countries share the same broad timezone. This makes for easy identification of 'busy' hours (normal trading hours) and 'quiet' hours (major markets are closed).

From there, we can construct two new price series consisting only of movements within those hours - one for busy, one for quiet.

The preliminary results (for the sample period 2018) indicate that the movements in the pair were driven mainly by activity in the Busy period - seeing how the Busy moves almost alongside the Actual. This is an expected outcome - we expect  that real money (coming in during the market hours) are what drives prices and create permanent impact.

However, the Quiet period, over the course of days/weeks, can move in the opposite direction of the Busy trend. As examples, the major down move from Jul to Oct driven by Busy period was partially offset by the Quiet period upward move. The following rally by Busy was also partially dampened by Quiet in Oct to Dec.

Do note though that this mean reversion in quiet hours is not strong enough on a daily basis to warrant a fade-the-move style of trading. The daily change correlation is near 0, and the cumulative prices correlations are near 0 too.

We need to dig deeper into how this effect plays out on an aggregate level to produce the offsetting effects we see in the 2 example periods highlighted above.