Abstract
We study the reaction of the CHF and JPY to macroeconomic surprises and changes in the broader market environment before and during the crisis using high-frequency data. Results show that the CHF and JPY are traditionally more sensitive to macroeconomic surprises than other currencies, reflecting the fact that macroeconomic surprises impact uncertainty and risk aversion. This link was further magnified during the crisis and could not be broken by the specific measures adopted by monetary authorities to limit the appreciation trend. We also find some evidence that, during the crisis, CHF and JPY responded more strongly to surprises generating an appreciation than to surprises leading to a depreciation. Additionally, both currencies also systematically respond to changes in the general market environment. This result is robust to the use of two measures of the market environment: VIX and on a novel index based on Bloomberg wires.
Highlights
The Swiss franc (CHF) and the Japanese yen (JPY) are prominent safe-haven currencies
Based on a very broad sample of high-frequency data covering the period between January 2000 and December 2013, we study the effect of macroeconomic surprises stemming from ten different economies, the general market environment and the monetary policy regime on the Swiss Franc (CHF) and JPY exchange rates
In order to do that, we extend our analysis of the impact of macroeconomic surprises to three additional currencies: the Australian Dollar (AUD), the Canadian Dollar (CAD), and the British Pound (GBP)
Summary
The Swiss franc (CHF) and the Japanese yen (JPY) are prominent safe-haven currencies. The safe-haven status of these currencies implies that the demand for CHF and JPY is crucially driven by shocks that raise the general level of uncertainty on the international financial markets. Based on a very broad sample of high-frequency data covering the period between January 2000 and December 2013, we study the effect of macroeconomic surprises stemming from ten different economies, the general market environment and the monetary policy regime on the CHF and JPY exchange rates. The measure of risk that appears to matter most is FX market volatility, i.e., FX-specific risk rather than general measures of risk such as the VIX In their effort to identify what characterizes a safe-haven currency, Habib and Stracca (2012) fail to find a stable link between the VIX and the currencies of advanced economies. The evidence on the usefulness of the VIX as a measure of global risk aversion to explain the behavior of safe-haven currencies is mixed
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