Abstract
We examine how Chinese and US macro announcements affect the volatilities of Chinese renminbi (RMB) onshore (CNY) and offshore (CNH) exchange rates. We find that RMB exchange rates will generally become more stable if either China or US display better economic performance than expectation and otherwise more volatile if China or US fundamentals perform worse than expected. We also find the dominant role of Chinese macro news on the volatilities of both CNY and CNH from the perspective of average magnitudes. Decomposing the volatility into long-term trend and short-term cyclical components, we discover a closer connection of macro news effect with the long-run component of the volatility. Moreover, we focus on the isolated effects of negative and positive surprises, and uncover greater influence of Chinese announcements on CNY while greater response of CNH to US announcements. However, we find no evidence of asymmetric effects of positive versus negative surprises. Considering the event of China’s exchange rate reform in 2015, our results suggest a growing impact of Chinese macro announcements on RMB volatility determination.
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