A wavelet analysis of U.S. interest rate swaps and forex markets

This study examines the dynamic lead-lag relationship between foreign exchange (FX) markets and one-year U.S. interest rate swaps using wavelet analysis. The sample covers the EUR/USD, JPY/USD, GBP/USD, AUD/USD, and CAD/USD exchange rates over the period from January 2, 2019, to February 10, 2023, encompassing the Covid-19 pandemic and the Russia-Ukraine war. Wavelet methods allow us to analyze how market dependence and lead-lag relationships evolve jointly across time and frequency. The results indicate that exchange rate movements generally lead interest rate swaps and that the two markets are predominantly in anti-phase at short horizons, implying opposite responses to shocks. Both crises generated substantial market disruptions, but their effects differed across currencies and time horizons. While the Covid-19 pandemic primarily increased volatility over short horizons (approximately one to three months), the Russia-Ukraine war generated more persistent effects, with longer-horizon responses (six months to one year) observed mainly for the euro, Japanese yen, and British pound.