Forget the latest news on Europe's sovereign-debt woes or even global economic data. Some strategists said there often is another force moving currencies: the time of day.
There are modest but regular gains to be made by playing the clock, if you know when to watch it, they said.
Royal Bank of Scotland Group strategists tracked the euro's intraday movement against the dollar from 2006 through 2011 and found that the common currency fell 0.02 percentage point on average in London morning hours and rose 0.03 to 0.04 point in London afternoon hours. This trend even has been more pronounced since the euro crisis came to dominate market attention.
"Traders coming into the London opening tend to be flooded with a lot of bad news about the euro," said Bernard Lock, director and head of Asian-Pacific at hedge fund FX Concepts. "So it's quite natural" to see the euro sold in early European trading.
The yen, by contrast, tends to strengthen versus the dollar in Asian trading, said Jesper Bargmann, a Singapore-based currency trader at RBS.
"You come in in the morning and if the [dollar] has rallied a bit in London or New York, we probably will see a bit of selling" of the dollar against the Japanese currency, he said. "You can often pick up [0.20 or 0.30 of a yen] that way."
Patterns can be shorter term, as well. Société Générale analyst Lauren Rosborough said this week that there had been a trend for risk-sensitive currencies such as the Australian and New Zealand dollars to rise in the Asian day and fizzle in U.S. trading but that the cycle appeared to be breaking down.
Pocketing regular gains is the Holy Grail for investors and traders, but even time-of-day enthusiasts acknowledge the gains from this tactic will be incremental, as the law of averages trumps day-to-day news flow and other factors over time.
The RBS strategists said in a research note that traders could use the time-of-day patterns to reap some gains, though transaction costs could eat up as much as half of the profits. Many traders develop an instinctive feel for when in the day to enter or exit a given trade. The intraday rhythms are "always at the back of your mind," RBS's Mr. Bargmann said.
Even longer-term investors could benefit by changing the timing of trades they already planned to execute, the RBS analysts said. "The patterns we have identified for currencies help an investor avoid buying near the high or selling near the low of the day," they said in the note.
As for why intraday patterns might persist over time, RBS suggests that investors tend to be net buyers of foreign currencies, so their own currencies would tend to decline during their local trading sessions. But while this might account for the euro's typical decline in European trade and the dollar's typical softness in New York, it doesn't explain why the yen gains an average 0.04 percentage point during Tokyo trading hours.
The yen's moves over the past few days have obliterated the trend. But during a stretch last week, the yen stuck to the script.
At 5 p.m. EST on Jan. 17, the start of the next day's Asian trading session, the yen stood at ¥76.82 to the dollar. The currency rose steadily for the next eight hours, hitting its intraday high of ¥76.65 just as Asian trading was wrapping up. The amount of yen equal to one dollar falls as the currency's value rises.
A day later, the yen started Asian trading at ¥76.84, then rose to ¥76.76 over the next eight hours. In both sessions, the yen fell back in New York trading to end the day weaker.
Perceptions about when currency authorities might act also could influence time-of-day patterns. Although the yen tends to strengthen in Asia, Tokyo traders said market participants often wait until after 10 a.m. local time to push the yen higher because the Ministry of Finance typically picks the early Tokyo hours when it intervenes to sell yen.
Even traders who are skeptical of using time of day to predict a currency's direction said the patterns can help determine when trading volume is highest.
"If we expect a lot of liquidity during a certain period, we can execute better for our clients without moving the market," said Martin Watson, director of foreign-exchange e-trading for Citigroup Asia Pacific. The most liquid times are at about 8 a.m. EST, or 1 p.m. in London, when trading overlaps, and around the time of Tokyo and London exchange-rate fixings, he said.
The time between New York close and Tokyo open, by contrast, is notoriously illiquid, and individual orders can have a big impact on exchange rates. On March 17, for example, the yen rocketed 4.6% to a record against the dollar in moments, a move exacerbated, traders said, by the fact that many traders weren't around.
read more: Olympus Wealth Management
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