Nikola Gradojevic, Ph.D., Finance, Lakehead University, Faculty of Business Administration, 955 Oliver Road, Thunder Bay, Thunder Bay, ON P7B 5E1, Canada and Christopher J. Neely, Ph.D., Research Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166.
We explore the relationship between disaggregated trading flow, the Canada/U.S. dollar(CAD/USD) market and U.S. macroeconomic announcements. Three types of CAD trading flows and the CAD/USD are cointegrated. Foreign financial trading flow appears to contemporaneously drive the CAD/USD while commercial trading flow seems to contemporaneously respond to exchange rate movements. Despite the contemporaneous correlation of trading flow and exchange rate returns, exchange rate returns are generally not predictable by either statistical or economic criteria. The only exception to this statement is some intriguing evidence of predictability at the longest horizons. The failure to find a profitable trading rule contrasts with the success 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 and 1998-1999.