Foreign Exchange Fixings and Returns Around the Clock

Abstract

This paper documents a new stylised fact in foreign exchange markets: intraday currency returns display prolonged reversals around the major benchmark fixings, characterised by an appreciation of the U.S. dollar pre-fix and a depreciation post-fix. We propose an explanation for this finding based on the interaction between time-zone segmented transaction demand and foreign exchange dealers who provide immediacy around the clock. Consistent with this explanation, intraday currency reversals in both spot and futures markets are explained by pre-fix order imbalance in the dealer market. However, controlling for dealer order imbalance, trading pressure in FX futures has little explanatory power in any market, highlighting the importance of heterogeneous trader types in exchange rate determination.

Keywords: foreign-exchange, fixings, high-frequency returns, intermediation.

JEL Classification: F30, F31, G15,