How currencies affect each other

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currency_causality

In an interconnected world, all the financial markets are part of an enormous chaotic system. Being part of this system means movement in a component will affect another one, and that one another, and so on.

What if we could know that today’s sales from fish seller in Shanghai will result in a new apartment building being financed in London? To have visibility to such a granular level would be madness, a wild dream only gods could afford. But we can have a bit of that omniscience, just a tiny peek into the future by understanding the nature of current relationships.

Hence, this research.

We aggregated daily data from all the currencies around the world over a period of 20 years, making use of Convergent Cross Mapping (great video here) we managed to get an small peek into how the change in one currency will affect another one the next day. e.g. If the value of the Euro goes up, the Denmark Krone will go up the next day. For simplicity, we get only the direction of change: up or down. Right now we can not know wether a currency will change by 1% or 10%.

As we started to find correlations, we glimpsed a bit of long running causalities, currency A affecting B, then affecting C. Using these causalities as our edges, we plotted a nice network graph that gives us some insight on how the world is connected by money.

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