Impact of Macroeconomic Announcements on Exchange Rates

1. Impact of Macroeconomic Announcements on Exchange Rates By: vigneshnathan Advisor: Andrew Patton

2. Motivation “…the disappointing [unemployment] data initially sent the Dow Jones Industrial Average down 160 points” -Wall Street Journal, 8/7/2011 However, the effects of a negative (or positive) announcement is very short-lived. “…but it recovered to end the day off 21 points to 10,653.56.” Research Question: How influential are certain types of macroeconomic news on asset prices, and how long-lived is their effect?

3. Basic Ideology 5 minutes 5 minutes • It is a central assumption of this study that within this 10-minute interval, the announcement drives all foreign exchange trading and is responsible for all resulting fluctuations in prices. • For this precise reason, we can treat the announcement as a “natural experiment.” This will allow me to use a relatively simple model.

4. Methodology The model is incredibly simple: Rt= α + βSt + ut Where, Rtis the ten minute return on the currency, given by: Rt= ln(FXt+5min) – ln(FXt-5min) St is the announcement surprise, given by: St = Announcementt - Expectationt utis the error term.

5. Canadian Unemployment Rate Announcement Effects Denotes a depreciation of the Canadian dollar. Denotes an appreciation of the Canadian dollar.

6. Canadian Monthly Retail Sales Announcement Effects Denotes a depreciation of the Canadian dollar. Denotes an appreciation of the Canadian dollar.

7. Summary Statistics for All Announcements Conclusion: Interestingly, all announcements have statistically significant effects on the foreign exchange market. The unemployment rate seems to be the most powerful and sought-after announcement, with a slope that doubles that of the next most influential announcement.

8. Asymmetric Response Very widely cited phenomenon in finance, states that foreign exchange markets respond in an unbalanced manner to different types of surprises, either given by its value (positive vs. negative, large vs. small) or its environment (good times vs. bad times)

9. Observations – Asymmetric Response • Pre-recession announcements are significantly more influential than those made during the recession. • “Bad news”—positive surprises of unemployment and negative surprises of anything else—tend to have bigger impacts than “good news” • This was true for unemployment, YoY Core/Headline inflation • Large surprises have disproportionately big effects compared to small surprises. • For most macroeconomic announcements, small surprises were not statistically significant.

10. Future Perform the same analysis, using identical announcements, for three other countries.

11. Troubleshooting/Questions Asymmetric Response: How few observations is too few? What are the weaknesses of only using one exchange rate to study certain currencies? How frail is the assumption that the announcement is the most significant driver of foreign exchange movements over the surrounding 10-minute interval? Should I expand the time horizon? Why are announcements less influential during the recession?