Monetary Policy and Currency Returns: the Foresight Saga
Series
School of Finance Working Paper Series
Type
working paper
Date Issued
2017-05
Author(s)
Abstract (De)
We document a drift in exchange rates before monetary policy changes across major economies. Currencies tend to depreciate by 0.7 percent over ten days before policy rate cuts and appreciate by 0.5 percent before policy rate increases. We show that available fixed income instruments allow to accurately forecast monetary policy decisions and thus that the drift is foreseeable and exploitable by investors. A simple trading strategy buying currencies against USD ten days ahead of predicted local interest rate hikes and selling currencies before predicted cuts earns on average a statistically significant return of 42 basis points per ten-day period. We further demonstrate that this return is robust to the choice of holding horizon and monetary policy forecast rule. Our results thus pose a major challenge for the risk-based explanations of the exchange rate dynamics.
Language
English
Keywords
Monetary Policy
Policy Expectations
Predictability
Overnight Index Swap
Foreign Exchange
HSG Profile Area
None
Publisher
SoF - HSG
Publisher place
St. Gallen
Volume
2017/08
Number
08
Pages
31
Subject(s)
Division(s)
Eprints ID
250986
File(s)![Thumbnail Image]()
open.access
Name
17_08_Pozdeev et al_Monetary Policy and Currency Returns.pdf
Size
1.44 MB
Format
Adobe PDF
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