The impact of macroeconomic surprises on spot and forward foreign exchange markets

Abstract

This paper evaluates the effects of surprises in 23 types of macroeconomic announcements on foreign exchange rates, and on the forward premium. Several findings emerge. First, as in the balance-of-payment framework, announcements that convey a decline in consumer demand increase foreign exchange rates. Second, the PPP hypothesis is rejected in favor of portfolio balance effects in determining exchange rates. Third, the behavior of forward premiums is consistent with covered interest rate parity. Fourth, exchange rates respond to announcements related to consumer demand, inflation, and interest rates, but not to the announcements directly related to the general strength of the economy. Finally, among the news releases considered, surprises in the Treasury budget, trade balance and capacity utilization have the strongest influence in the currency market. © 2005 Elsevier Ltd. All rights reserved.