The foreign exchange (FX) market operates around the clock, processing immense volumes of global transactions. Traditionally perceived as highly efficient and unpredictable, this market is thought to leave little room for consistent, exploitable patterns. However, recent research by Ingomar Krohn, Philippe Mueller, and Paul Whelan challenges this view by uncovering systematic intraday patterns in currency returns associated with major currency fixings.

In their paper, “Foreign Exchange Fixings and Returns Around the Clock,” the authors examine how predetermined currency fixings in Tokyo, Frankfurt (European Central Bank), and London impact high-frequency FX market dynamics. Analyzing the G9 currency pairs—which constitute approximately 75% of daily spot FX turnover—they dissect the trading day into five specific intervals surrounding these fixings. This segmentation allows them to isolate and scrutinize the effects of the fixings on currency movements over a 21-year period from January 1999 to December 2019.

A central finding of the study is the consistent “W-shaped” pattern observed in intraday currency returns. Specifically, the US dollar tends to appreciate against other major currencies before each major fix and depreciate afterward, creating predictable swings that challenge the efficient market hypothesis.

This figure displays cumulative average 5-minute returns (Δs) over the course of a trading day for the EUR (blue), GBP (green), and JPY (red), respectively. An increase means the foreign currency appreciates against the U.S. dollar. The three black dashed lines at 20:55, 8:15, and 11:00 refer to the Tokyo fix, the ECB fix, and the London fix, respectively. Returns are expressed in basis points. The time is measured in Eastern Time (ET). The sample period is January 1999 to December 2019.

Figure 1 illustrates this pattern for the Euro (EUR), British Pound (GBP), and Japanese Yen (JPY). The cumulative 5-minute returns over a 24-hour period reveal that these currencies systematically depreciate against the USD before each fix and appreciate afterward, highlighting a regular and predictable intraday cycle.

To assess the potential profitability of this pattern, the authors simulate a trading strategy that goes long USD before each fix and short USD afterward.

The figures show the performance of a trading strategy around the Tokyo and European fixes where an investor takes a long position in the U.S. dollar during the pre-fix and a short position during the post-fix. The top panels show the total return indices for the three major currencies (EUR, GBP, JPY) and a dollar portfolio (DOL) with an initial investment of one U.S. dollar. The bottom panels present the total returns year by year for the dollar portfolio. The sample period is January 1999 to December 2019.

Figure 2 demonstrates that this strategy could have yielded significant returns over the sample period. The cumulative return indices show consistent profitability, while the year-by-year analysis confirms the strategy’s persistence across varying market conditions.

The identification of predictable intraday patterns in FX returns has meaningful implications for return stacked portfolio strategies. Return stacking involves combining multiple sources of return within a single portfolio to enhance overall performance and capital efficiency. By layering returns from different assets or strategies, investors aim to achieve better risk-adjusted returns without proportionally increasing capital allocation.

The consistent W-shaped intraday patterns offer a potential source of portable alpha. Portable alpha refers to excess returns generated independently of traditional market exposures, which can be “ported” onto other investments. By exploiting these intraday FX movements, investors might capture additional returns that are uncorrelated with broader market trends.

Incorporating strategies that leverage these FX patterns into a return stacked portfolio could enhance diversification benefits. Since the drivers of these intraday movements—such as dealer inventory adjustments around fixings—are distinct from factors affecting traditional asset classes, they may provide uncorrelated returns. This could improve the overall risk-return profile of the portfolio and enhance capital efficiency.

“Foreign Exchange Fixings and Returns Around the Clock” sheds light on the intricate dynamics of the FX market, revealing robust intraday seasonality linked to major currency fixings. The authors attribute the predictable W-shaped patterns to dealer inventory risk management, as dealers adjust their positions to accommodate anticipated order flows around fixings.

For investors, these findings open avenues to enhance portfolio returns through strategic exposure to intraday FX patterns. By integrating such strategies within a return stacking framework, investors can potentially access uncorrelated sources of return, improving diversification and capital efficiency. Practical implementation would require careful consideration of transaction costs, liquidity constraints, and evolving market conditions.

This research prompts a reevaluation of conventional perspectives on FX market efficiency and encourages the exploration of innovative investment strategies. As understanding of intraday FX patterns deepens, investors can better navigate the complexities of the global currency markets and optimize their portfolios through thoughtful return stacking approaches.