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Volume 5, Issue 2

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Volume ,5 Issue 2

Impact of Macroeconomic News Announcements on the Correlation of Exchange Rates


Vijaya Naga Pravallika Emmaneni, Abhinav Pal and Dr Chandan K. Tiwari

  1. Student, M.Sc. (Economics and Social Sciences), Bocconi University, Milan, Italy
  2. Assistant Professor, Symbiosis Centre for Management Studies, NOIDA, India
  3. Assistant Professor, Symbiosis Centre for Management Studies, NOIDA, India

The study on impact of macroeconomic announcements on exchange rate volatility and returns is very extensive but literature on exchange rate correlation, although an important factor in risk management and portfolio diversification is very scarce. This paper aims to understand the impact of four macroeconomic variables – GDP, CPI, Unemployment rate and International Trade Balance on the correlation of exchange rates. The announcements considered under the study are from the European Commission and Switzerland, and the exchange rates are USD/ EUR and USD/CHF. The study considers only the surprise effect; the announcements that are not in line with the expectations. The realized correlations are transformed through Fisher transformations in order to remove the constraint of [–1, +1]. The fisher transformation of the realized correlation between exchange rates is linearly regressed on the standardized surprise element of each of the variables, but the standard errors are computed through the Newey West method. Further, the effect of business cycles is also incorporated and the results are checked for effect from an external variable – CHF’s temporary peg to the EUR. It was found that the Eurozone Trade Balance and Switzerland GDP are important announcements that significantly affect the correlation between the euro and franc. Both these announcements lead to a positive change of around 30% on the realized correlation. Further, it was found that the effect of Eurozone’s GDP and Switzerland’s CPI significantly change during an expansion and recession respectively.


Macroeconomics, Exchange Rates, Trade Balance, GDP, CPI

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