Journal of International Financial Markets, Institutions and Money
Macroeconomic news and exchange rates
Introduction
According to the efficient-markets view of asset price determination, asset prices move whenever new, relevant information arrives. The full response to such news should be quick, perhaps within minutes, assuming that the financial markets are open at the time the news is announced. Numerous studies have investigated this prediction, often with stock price data.1 Many macroeconomic announcements in the U.S. are, however, made when the stock market and some debt markets are closed; presumably to let market participants digest the news. This makes it more difficult to estimate how quickly news is reflected in price changes. Foreign exchange markets, however, do not close so that exchange rate responses are a natural variable to test the speed with which the market responds to relevant news.
Foreign exchange rates have another advantage over stock prices and bond prices in understanding the responses of asset prices to economic news. Economic announcements may trigger changes in expected inflation or changes in the expected policy moves of the central bank. For example, an announcement of stronger-than-expected economic activity may cause economic agents to increase their expected inflation rate or to increase their expectation that the central bank will raise real interest rates in the near future. Either response should cause bond prices to fall and are likely to cause stock prices to fall. With foreign exchange rates, however, higher expected inflation should cause a depreciation whereas higher expected real interest rates should cause an appreciation.
Although there have been several studies on exchange rate responses to macroeconomic news, they generally have not used exchange rate changes over very short time intervals. Given the noisy nature of exchange rate changes, the typical finding that many news announcements have no perceptible effect on exchange rates might be due to too-long time intervals over which responses are measured.2 Almeida et al. (1998) address this question by using high-frequency data on the dollar–Mark exchange rate and find that the length of the time interval does affect the significance of the response to some announcements.3 A recent paper by Andersen et al. (2003) uses similar high-frequency data and again finds a significant and very fast response of exchange rates to several U.S. macroeconomic news announcements.
This paper, which also employs high-frequency data on exchange rates, extends previous work in several ways. First, we examine a longer time period than previous studies. Second, we test whether the responses of the dollar–Mark and dollar–Yen exchange rates to U.S. macroeconomic news are the same. The responses could differ, for example, if the central banks of Germany and Japan were expected to react differently to U.S. news.4 Third, we investigate whether there are threshold effects in the responses to news and whether the effects of news depend on the “sign” of the news.5 Fourth, we allow the state of the economy to affect the size of the responses.6 If Almeida et al. (1998) and others are correct in attributing the responses to announcements, as largely due to the anticipated policy response of the Federal Reserve, it is plausible that the expected reaction of the Federal Reserve to any announcement about the economy may depend on whether the economy is in an expansion or a recession. Moreover, the effect of news on expectations of future economic developments may be state dependent. News of higher-than-expected inflation may affect future expectations of inflation differently if the economy is in a recession than it would if the economy is in an expansion. Hence, we test whether the effect of news differs across states of the economy. Given previous papers that have found that asset price volatility is also affected by news, we analyze news effects on both changes in exchange rates and their volatility.7
Section snippets
The response to news
We employ the standard model used in previous work to examine the response of exchange rates to news. Let ext,k denote the exchange rate return as measured by the percentage change in the exchange rate from time t to time t + k, Nit denote the unexpected or news component of the announcement of variable i at time t, and Njt denote the news component of any other announcement made at time t. The last set of variables is needed because some U.S. macroeconomic data announcements are made at the same
Estimated effects of news on exchange rates
We first estimate Eq. (1) for each news event using 5-min changes in the exchange rates right after the announcements.15 Table 2 reports the estimated effects of each news event on the returns for the Mark and the Yen and their volatilities
Conclusions
Using high-frequency data that measured 5-min changes in exchange rates, we find that the dollar–Mark and dollar–Yen exchange rates responded significantly to the unexpected component of several U.S. macroeconomic announcements during the 1986–1996 period. The news events that were significant were generally announcements about the real economy. Inflation surprises did not appear to cause an exchange rate response. Announcements indicating that U.S. economic growth was stronger than anticipated
Acknowledgements
We thank Karlyn Mitchell and an anonymous referee for helpful comments.
References (25)
- et al.
Balance of trade announcements and asset prices: influence on equity prices, exchange rates, and interest rates
Journal of International Money and Finance
(1992) - et al.
The impact of news on the exchange rate of the lira and long-term interest rates
Economic Modelling
(2002) Economic news, exchange rates and interest rates
Journal of International Money and Finance
(1988)- et al.
Trade balance news and exchange rates: is there a policy signal
Journal of International Money and Finance
(1991) - et al.
News from the U.S. and Japan: which moves the Yen?
Journal of Monetary Economics
(1987) - et al.
Exchange rates, interest rates and current account news: some evidence from Australia
Journal of International Money and Finance
(1995) - et al.
Minute-by-minute dynamics of the Australian bond futures market in response to new macroeconomic information
Journal of Multinational Financial Management
(2001) - et al.
Rationality of survey data and tests for market efficiency in the foreign exchange market
Journal of International Money and Finance
(1992) A note on economic news and intraday exchange rates
Journal of Banking and Finance
(1997)- et al.
The effects of inflation news on high frequency stock returns
Journal of Business
(2004)
Are survey forecasts of macroeconomic variables rational?
Journal of Business
The effects of macroeconomic news on high frequency exchange rate behavior
Journal of Financial and Quantitative Analysis
Cited by (32)
How do macroeconomic news surprises affect round-the-clock price discovery of gold?
2021, International Review of Financial AnalysisCitation Excerpt :While Smales and Yang (2015) document that the US Consumer Price Index is the most influential news for gold, which is consistent with the inflation hedging property of gold. Moreover, Pearce and Solakoglu (2007) argue that only the unanticipated news component, i.e. news surprise, should impact asset prices rather than news announcement timings, consistent with the efficient market hypothesis. Besides, Nowak et al. (2011) and Smales and Yang (2015) document that market reaction to macroeconomic news is significantly larger when news surprise is greater, and dispersion of analysts' forecast is wider.
Emerging market exchange rates during quantitative tapering: The effect of US and domestic news
2021, Research in International Business and FinanceHow much does economic news influence bilateral exchange rates?
2021, Journal of International Money and FinanceCitation Excerpt :Huberman and Regev (2001), Tetlock (2011) and Narayan (2019), however, find that stale news matters for stock returns. With regard to exchange rates, the response to unanticipated news is very rapid (Pearce and Solakoglu, 2007). Therefore, we do not find any evidence of the impact of stale news.13
News implied volatility and long-term foreign exchange market volatility
2019, International Review of Financial AnalysisCitation Excerpt :Secondly, the existing FX studies have mostly unveiled the short-term impact of news announcements on exchange rates (Andersen et al., 2003, 2007; Chan, Chhagan, & Marsden, 2017; Fatum & Scholnick, 2008; Faust, Rogers, Wang, & Wright, 2007; Pearce & Solakoglu, 2007), and ignored the long-run effect. These investigations mainly lie at event analysis at intradaily or daily frequencies, since FX markets might react to macro news releases instantaneously (Bauwens et al., 2005; Degennaro & Shrieves, 1997; Omrane & Savaşer, 2016; Pearce & Solakoglu, 2007). Although the adoption of high frequency data is long-standing, it mostly focuses on specific events or macro announcements with a narrow window, and until recently it seldom explored the time-varying effects of news over a long period.
Exchange rates and macro news in emerging markets
2018, Research in International Business and FinanceExchange rate volatility response to macroeconomic news during the global financial crisis
2017, International Review of Financial AnalysisCitation Excerpt :We focus on volatility reaction to news because macroeconomic news is an important contributor to volatility accounting for about a third of the total price variation in currency markets (Evans and Lyons (2003)). Although many studies investigate the state-dependent impact of macroeconomic news on conditional mean returns (e.g. Andersen, Bollerslev, Diebold, & Vega, 2003, 2007; Bauwens, Ben Omrane, & Giot, 2005; Fatum, Hutchison, & Wu, 2010; Faust, Rogers, Wang, & Wright, 2007; Goldberg & Grisse, 2013), the foreign exchange (FX) literature on the time-varying volatility reaction to macroeconomic news is rather sparse (two notable exceptions are Pearce & Solakoglu, 2007 and Laakkonen & Lanne, 2009). Although earlier studies document a relatively stable link between macroeconomic news announcements and exchange volatility, this relationship can become unstable over time due to fluctuations in economic activity or changes in investors' perception about the future economic outlook (as documented in other markets around the global financial crisis such as Égert & Kočenda, 2014; Huang, 2015; Mishra, Moriyama, & N'Diaye, 2014).