The Dynamic Interaction of Order Flows and the CAD/USD Exchange Rate

35 Pages Posted: 11 Feb 2008

See all articles by Nikola Gradojevic

Nikola Gradojevic

University of Guelph, Department of Economics and Finance; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Date Written: February 2008

Abstract

We explore the relationship between disaggregated order flow, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements. Three types of CAD order flow and the CAD/USD are cointegrated. Financial order flow appears to contemporaneously drive the CAD/USD while commercial order flow seems to contemporaneously respond to exchange rate movements. Past order flow and lagged exchange rates strongly explain most types of order flow. Despite this predictability and the contemporaneous correlation of order flow with exchange rate returns, exchange rate returns are not predictable by either statistical or economic criteria (trading rule). This negative finding contrasts with that of Rime et al (2007), who use a different data set. There is strong evidence of structural breaks in the order-flow-exchange rate systems in 1994, 1996-1997 and 1999-2000.

Keywords: Foreign exchange, Order flow, Market microstructure, Macroeconomic announcements

JEL Classification: F31, F37, C32

Suggested Citation

Gradojevic, Nikola and Neely, Christopher J., The Dynamic Interaction of Order Flows and the CAD/USD Exchange Rate (February 2008). Available at SSRN: https://ssrn.com/abstract=1090563 or http://dx.doi.org/10.2139/ssrn.1090563

Sharon Kay Van Stratton (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Nikola Gradojevic

University of Guelph, Department of Economics and Finance ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

HOME PAGE: http://https://www.uoguelph.ca/economics/users/nikola-gradojevic

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

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