Impact of Macroeconomic News Announcements on the Correlation of Exchange Rates

Author(s)

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

Affiliations

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

Abstract

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.

Keywords

Macroeconomics, Exchange Rates, Trade Balance, GDP, CPI

References

1. Almeida, A., Goodhart, C., & Payne, R. (1998). The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior. The Journal of Financial and Quantitative Analysis, 383-408.
2. Andersen, T. G., & Bollerslev, T. (1998). Deutsche Mark-Dollar Volatility. The Journal of Finance, 219-265.
3. Andersen, T. G., Bollerslev, T., Diebold, F. X., & Vega, C. (2003). Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange. The American Economic Review, 38-62.
4. Balduzzi, P., Elton, E. J., & Green, C. (2001). Economic News and Bond Prices: Evidence from the U.S. Treasury Market. The Journal of Financial and Quantitative Analysis.
5. Burckhardt, N. (2012). Essays on the Correlation of Foreign Exchange Rates. Zurich: University of St.Gallen.
6. CEPR. (n.d.). Euro Area Business Cycle Dating Committee Announcements. Retrieved March 2, 2017, from CEPR: http://cepr.org/content/ euro-area-business-cycle-dating-committee- announcements?_ga=1.166909181.213783523 6.1489339991#overlay-context=
7. Christiansen , C., & Ranaldo, A. (2006). Realized Bond-Stock Correlation :Macroeconomic Announcements Effects.
8. Chulia-Soler, H., Martens, M., & Dijk, D. v. (2009). Asymmetric Effects of Federal Funds Target Rate Changes on S&P 100 Stock Returns, Volatility, and Correlations. Rotterdam: ERIM Report Series.
9. Dominguez, K. M. (1999). The Market Microstructure of Central Bank Intervention. National Bureau of Economic Research.
10. Ederington, L. H., & Lee, J. H. (1993). How Markets Process Information. The Journal of Finance, 1161-1191.
11. Evans, M. D., & Lyons, R. K. (2005). Meese- Rogoff Redux: Micro-Based Exchange-Rate Forecasting. The American Economic Review, 405-414.
12. Fischer, A. M. (2002). Fluctuations in the Swiss Franc: What Has Changed since the Euro’s Introduction? Journal of Public Policy, 143-159.
13. Karali, B. (2012). Do USDA Announcements Affect Comovements Across Commodity Futures Returns? Journal of Agricultural and Resource Economics, 77-97.
14. Laakkonen, H. (2007). The impact of macroeconomic news on exchange rate volatility. Finnish Economic Papers.
15. Love, R., & Payne, R. (2008). Macroeconomic News, Order Flows, and Exchange Rates. The Journal of Financial and Quantitative Analysis, 467-488.
16. Mark, N. c. (1995). Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability. The American Economic Review, 201-218.
17. Meese, R. A., & Rogoff, K. (1983). Empirical Exchange Rate Models of the Seventies. Journal of International Economics, 3-24.
18. Menachem, B., Pasquariello, P., & Subrahmanyam, M. (2009). On the Volatility and Comovement of U.S. Financial Markets around Macroeconomic News Announcements. The Journal of Financial and Quantitative Analysis, 1265-1289.
19. N.R.Bhanumurthy. (2006). Macroeconomic Fundamentals and Exchange Rate Dynamics in India: Some Survey Results. Economic and Political Weekly, 1101-1107.
20. Ojstersek, M. (2014). The short-term effect of economic releases on exchange rate movements. University of Ljubljana.
21. Reinhart, C. M. (2000). The Mirage of Floating Exchange Rates. The American Economic Review, 65-70.
22. Thomakos, D. D., Wang, T., Wu, J., & Chuderewicz, R. P. (2008). Macroeconomic Announcements, Intraday Covariance Structure and Asymmetry in the Interest Rate Futures Returns. The Journal of Futures Markets.
23. Vrugt, E. B. (2010). It’s not just US news that matters.
24. Williams, R. (2015, Febraury 20). Interaction effects and group comparisions. Retrieved March 2017, 3, from http://www3.nd.edu/~rwilliam/