Does the Timing of Central Bank Announcements Matter? Trade-Level Data on Hedge Fund Behavior Before Swiss National Bank Meetings

Abstract

Just over three years after enacting a Minimum Exchange Rate policy for the Swiss Franc vs. Euro (EUR/CHF), the Swiss National Bank (SNB) removed it in a surprise announcement on January 15, 2015. The announcement shocked the FX market — EUR/CHF dropped 25.5 percent in the minutes that followed the press release. The JPMorgan Chase Institute leveraged a data asset of 395 million de-identified transactions executed by over 44,000 institutional investors to measure hedge fund net flows in EUR/CHF spot and forward transactions during the SNB’s Minimum Exchange Rate policy period. Our analysis uncovers two key findings related to hedge fund trading in EUR/CHF during the Minimum Exchange Rate policy period. First, we observe that after hedge funds executed the long EUR/CHF strategy, they then sold EUR/CHF in the days immediately preceding the next regularly scheduled SNB announcement, reducing their potential losses if the Minimum Exchange Rate policy was removed at that meeting. Second, hedge fund's confidence in the persistence of the SNB's Minimum Exchange Rate policy appears to have peaked in the four weeks before the policy was removed. Taken together, our findings have implications for central banks as they consider how their choices with respect to communicating policy changes might impact financial market stability. When choosing the most appropriate method to communicate policy changes, policymakers can use our results to help weigh market expectations with respect to both the timing of announcements and the policy outcomes in the context of the central bank's desired market impacts.