Foreign Currency Market Research Articles

Informal Foreign Currency Market Rate Coordination and Remittance Flows

ABSTRACT An unintended consequence of remittance flows to economically troubled countries may be the exacerbation of parallel foreign currency market activities. Studying clandestine markets is often hobbled by a lack of data on informal market coordination mechanisms. This paper examines the impact of the sudden cessation of an informal foreign currency exchange reference rate in Zimbabwe on inward remittance flows and public attention to money transfer operators. While the reference rate existed, there was bi-directional feedback between black market currency rates and retail diaspora remittance flows, but not with the flows of non-governmental organizations (NGOs). The abolition of the informal reference rate did not stall retail diaspora remittance flows. NGO remittances reacted negatively to the ban, suggesting concerns with government policy. Online attention on money transfer operators increased after the reference rate’s cessation suggesting remitters shifted to formal channels. Accordingly, remittance costs reduced significantly.

The relationship between Foreign Direct Investment, trade openness, exchange rate, and Gross Domestic Product per capita in Vietnam

Aim/purpose – This study explores the nexus between Foreign Direct Investment (FDI), trade openness, exchange rate, and Gross Domestic Product (GDP) per capita in Vietnam between 1986 and 2020. Design/methodology/approach – The Vector Error Correction Model (VECM) was used to evaluate the nexus between FDI, trade openness, exchange rate, and GDP per capita in Vietnam between 1986 and 2020. Moreover, the Johansen co-integration test examined the long-run relationship among these variables. Findings – Results address that GDP per capita, FDI, and trade openness may generate an appreciation of the Vietnamese currency in the short run. In the long run, we found that FDI inflows and trade openness support GDP per capita, but the depreciation of Vietnam Dong harms the economic growth of this country in the long run. The Johan- sen co-integration test confirmed a long-run association among GDP per capita, FDI inflows, trade openness, and exchange rate. Results also indicated a unidirectional cau- sality running from GDP per capita and trade openness to FDI and exchange rate. In addition, a bidirectional causality ran from FDI to the exchange rate. Research implications/limitations – Policies were recommended to facilitate macroe- conomic stability for Vietnam. First, fiscal and monetary policies should be carried out to achieve targets in macroeconomic stability, economic development, employment creation, and inflation control. Second, FDI inflows should continue to be encouraged since they accelerate economic growth. Still, FDI projects should concentrate on improving labor skills and technological progress and promoting sustainable development in crucial sectors such as agriculture, energy, and the environment. Third, fostering innovation in exports by shifting focus from raw materials and inputs exports towards processed and high-value-added commodities while also promoting exports from domestic enterprises to reduce reliance on exports from FDI enterprises. Lastly, improving flexible and active exchange rate regimes consistent with real conditions in both domestic and international markets is necessary to stabilize the exchange rate and foreign currency market in Vietnam. Originality/value/contribution – This paper contributes to the field by providing spe- cific policy recommendations for Vietnam. These recommendations aim to stabilize the economy, attract FDI, renovate exports, and implement flexible and active exchange rate regimes. Keywords: Foreign Direct Investment (FDI), trade openness, exchange rate, Gross Domestic Product (GDP) per capita. JEL Classification: E60, O11, O24.

Financial markets, inflation and growth: The impact of monetary policy under different political structures

This study assesses the likely effects of different political structures on economic growth by the effects of interest rate on the linkage between financial markets. For this aim, we chose two developing economies with different governance structures, Iran and Argentina. There is a political structure in Iran influenced by religion, whereas Argentina’s political structure does not deal with religion. We first assess the causality amongst the financial markets of the stock market, bank deposits, and the foreign currency market (CM). Then, the effects of the markets and inflation on economic growth are assessed using Granger-causality tests and Markov-switching models. The results show that there are bidirectional causalities between the financial markets in Iran, and unidirectional causalities in Argentina. The markets affect economic growth in the both countries. For Iran, the monetary policy instrument of interest rate indicates no causalities to the markets, whereas there are strong causalities from interest rate to the markets in Argentina. As a result, Argentinian Central Bank can affect economic growth through the money flow between the markets by freely changing interest rate proportioned with the economic situation. Whereas there is no such a possibility for Iran’s Central Bank. In other words, an active Central bank against the inflation volatility in Argentina versus a passive Central Bank in Iran is one of the consequences of the interest rate repression in a political structure influenced by religion.

The Asymmetric Effect of the Extreme Changes in the Economic Policy Uncertainty on the Exchange Rates: Evidence from Emerging Seven Countries

This research has focused on examining the connection between uncertainties in economic policies and exchange rates. This research extends the literature to this field by analyzing the impact of small to large negative along with small to large positive variations in the economic policy uncertainty on the currency rates. For this purpose, this research uses the Granger causality in the quantile test and a newly constructed multiple asymmetric threshold nonlinear ARDL (MATNARDL) model. When a nonlinear ARDL model is utilized, our results confirmed the nonlinear impact in three nations only. In contrast, when the MATNARDL technique is utilized, these findings do confirm the nonlinear effect for all nations. Furthermore, when the Granger causality in the quantile test is applied, the impact differs over various quantiles. In general, the enhanced framework encourages us to analyze better how EPU affects the exchange rate in the emerging seven (E7) nations. The findings of our research may be useful for state banks to design policies to make interventions in the foreign currency market.

Things Fell Apart: Categorization During a Foreign Currency Market Crisis

While prior studies underscore how categories facilitate market stability, little is known above categorization processes during market instability. This study examines how actors categorize in unstable markets. We conduct an inductive inquiry into a foreign currency market instability in Nigeria using data from the nation’s central bank, news articles, and interviews from actors in the foreign currency market. We propose that market instability is a form of category crisis. We further identify two mechanisms of category shifting (the process of attributing causes to category crisis) and category sifting (the enactment of inferences of the category shifting) as important components of categorization processes during market instability. We examine the implications of our findings from category in market literature and illustrate how market instabilities can provide unique contexts for categorization processes.

Forecasting the Crisis of Vietnam's Financial Market by Markov Switching VAR Model

The global economy and financial markets have experienced "The most adverse shock in a century" due to the impact of the Covid-19 epidemic but are also transforming enormously in the digital era. Besides, Vietnam's financial system has been making vital development steps, increasing its resilience. Still, its development prospects depend mainly on the recovery of the global economy and financial markets, the Stability of the economy, and the Stability of the economic stability and sustainability of investor confidence in the market. The Markov Switching Var (MSVAR) model will measure the crisis in the Vietnamese financial system. The research goals reveal that the volatility of macro variables such as the exchange rate (ER), foreign exchange reserves (FR), and the domestic interest rate differential (ID) affects the financial market crisis in Vietnam from 2010 to 2020. According to MSVAR estimation, establishing the time of the financial market crisis correlates with the period of higher volatility in the foreign currency market. Thus, the article's novelty is to proactively seize opportunities development prospects and prevent risks towards sustainable development, and strategic solutions are needed.

Stock market flexibility during COVID-19 pandemic: evidence from Pakistan

PurposeThe authors examine the impact of coronavirus disease 2019 (COVID-19) pandemic on the stock market, forex market and gold market of Pakistan.Design/methodology/approachBy using the daily data of COVID-19 confirmed cases, stock index, foreign currency rates and gold prices for the period 10 March 2020 to 16 October 2020, the authors explore that the stock index negatively responds to the corona pandemic.FindingsAdditionally, the authors observe the price hikes in gold and foreign currency corresponding to the number of COVID-19 positive cases.Practical implicationsThe study analysis unveils that the stock market adversely responds to a pandemic, whereas, forex and gold markets serve as a safe haven for investors at the time of financial distress.Originality/valueThis study complements the literature and provides empirical evidence of the stock market, the gold market and foreign currency market, in the perspective of Pakistan.

Short-run Dynamics Between Foreign Currency and Jakarta Composite Index During Indonesian Presidential Election

This study investigates the dynamics of information flow between foreign currencies and the Jakarta Composite Index (JKSE) in the pre-, during and post-2014 Indonesian Presidential elections. Based on a systematic analytical framework, the study provides a clearer picture to link the foreign currencies of trade partners to Jakarta Stock Exchange. Using the VAR model with daily data from 2 January 2013 to 31 July 2015, our results show: First, JKSE appears to be endogenous during the pre-election period. The endogenous relationship implies that the EUR, HKD and CNY influence the benchmark index. Second, JKSE appears to be exogenous during the election year. The exogenous relationship implies information flow from JKSE to six foreign currencies. Third, during the postelection period, there is information flow from the Japanese Yen and Saudi Riyal to JKSE. In addition, there is information outflow from JKSE to three foreign currencies. This study concludes that the foreign currency market is subtly linked to JKSE. Our results imply a need to guard against capital flight during uncertainties as the foreign fund may exit the market. Deeper economic ties can be made with foreign trade partners willing to inject capital during economic recovery in the short run.

Multiscale Stochastic Volatility Model with Heavy Tails and Leverage Effects

This paper studies multiscale stochastic volatility models of financial asset returns. It specifies two components in the log-volatility process and allows for leverage/asymmetric effects from both components while return innovation terms follow a heavy/fat tailed Student t distribution. The two components are shown to be important in capturing persistent dependence in return volatility, which is often absent in applications of stochastic volatility models which incorporate leverage/asymmetric effects. The models are applied to asset returns from a foreign currency market and an equity market. The model fits are assessed, and the proposed models are shown to compare favorably to the one-component asymmetric stochastic volatility models with Gaussian and Student t distributed innovation terms.

The effect of changing the exchange rate on some economic variables by using the autoregressive distributed Lag (ARDL) in Iraq

The issue of the exchange rate has emerged as one of the most important problems facing countries in drawing the parameters of their foreign exchange, as dealing in the foreign currency market has become one of the most dangerous transactions, and studies have shown the existence of several mutual effects between exchange rate fluctuations and macroeconomic variables. The study focuses on analyzing the impact of fluctuations The exchange rate on macroeconomic variables. This comes in the wake of the fundamental changes in the macroeconomic indicators in Iraq, which included inflation and oil prices, which had a major impact on the value of the Iraqi dinar against the US dollar. The Autoregressive Distributed Lag (ARDL) was used to analyze time-series data from 1990-2017. This model can distinguish between dependent and explanatory variables and eliminate the problems that may arise due to the presence of autocorrelation and internal growth. The ARDEL model can also estimate the short-term and long-term relationship, simultaneously. The results showed that there is a long-term relationship between the exchange rate with inflation, GDP, expanded the money supply, and foreign reserves. This is consistent with the reality of economic theory, but in the short term, there is a relationship between the exchange rate and inflation. The reason is that there is no relationship between the price Exchange and other variables in the short term due to the inability to demonstrate the impact of these variables in a relatively short period, from which we conclude that reducing volatility in macroeconomic variables due to the stability the exchange rate in the Iraqi economy to help decision-makers draw correct economic policies.

Моделирование динамики валютного курса стран-экспортеров сырья в условиях инфляционного таргетирования (Modeling the Dynamics of the Exchange Rate of Countries-Exporters of Raw Materials in the Context of Inflation Targeting)

Russian Abstract: В работе проводится изучение ключевых факторов динамики валютного курса рубля и анализ особенностей функционирования российского валютного рынка в условиях инфляционного таргетирования и применения бюджетного правила. В первом разделе представлены основные теоретические подходы к моделированию динамики номинального валютного курса, включая поведенческие модели валютного курса, модели с учетом кривой доходности и риска ликвидности. Выявлены ключевые факторы долгосрочной и краткосрочной динамики валютного курса, включая условия торговли, дифференциал ставок процента. Во втором разделе приведены результаты анализа механизмов и степени воздействия бюджетного правила на динамику валютного курса в странах-экспортерах сырья, таргетирующих инфляцию. Приведены результаты оценок степени отклонения валютного курса от фундаментально обоснованных значений, а также выявлены риски и последствия функционирования экономики в условиях переоценки/недооценки валютного курса. В третьей части представлены результаты оценки модели номинального курса рубля на периоде после перехода к режиму инфляционного таргетирования с использованием VECM-, DOLS- и ARDL- подходов. Показано, что ключевыми факторами, формирующими динамику курса рубля, являются цена на нефть, дифференциал ставок процента, индекс волатильности VIX, а также операции Минфина России по покупке иностранной валюты. English Abstract: The study investigates the key factors of the ruble exchange rate dynamics, analyzes important features of the Russian foreign currency market in the context of inflation targeting, and budget rule. The first part of this study presents the main theoretical approaches to modelling the dynamics of the nominal exchange rate, including behavioral models of the exchange rate, models with the yield curve and liquidity risk. The key factors of long-term and short-term dynamics of the exchange rate, including terms of trade, differential interest rates, etc. are discussed. The second section presents the results of an analysis of the mechanisms and degree of influence of the budget rule on the dynamics of the exchange rate in commodity-exporting countries that target inflation. We present the results of assessments of the degree of deviation of the exchange rate from fundamental values, and identify the risks and consequences of the functioning of the economy under revaluation / underestimation of the exchange rate. The third part of the study presents the results of modelling the nominal ruble exchange after the transition to inflation targeting using VECM-, DOLS- and ARDL-approaches. It is revealed that the key factors of the ruble exchange rate dynamics include oil price, interest rate differential, VIX volatility index, as well as the operations of the Ministry of Finance of Russia to purchase foreign currency.

Real Time Data

Interpretation of exchange rate volatility in the light of economic fundamentals comprises an issue of interest for policymakers when it comes to implementing the monetary policy. Understanding the impact of economic news on the Lek exchange rate against two main hard currencies, Euro and US dollar, would serve to better orient the monetary policy and forex market agents positioning in time. Exchange rates volatility on economic news in short-term is an often discussed phenomenon in the economic literature, but through this material we tend to measure these effects in the Albanian foreign currency market and contribute in the literature interpreting foreign currency markets volatility in developing economies. Very often, domestic foreign exchange movements are attributed to developments in large international markets. In the case of Albanian Lek volatility analysis, we tend to find answers regarding the importance of economic news coming from the two main economies in focus, Eurozone and the US. Furthermore, we investigate the importance of the economic information flow in Albania in determining the Lek exchange rate against Euro and US dollar. For a period in focus from January 2007 until July 2012, we try to understand if the exchange rate volatility has been a result of economic fundamentals or financial markets stress related economic news.

Empirical scaling relations of market event rates in foreign currency market

The mechanism of order book dynamic is studied by using ultra high frequency data in terms of three market events: injection, cancellation, and transaction. We analyzed the empirical decision-making process of market participants focusing on the event rates conditional on the depth from the mid-price. We observed that both injection and cancellation rates depend on the market depth with exponential decay near the mid-price, which is different from the conventional assumption of the homogeneous Poisson process for the order book formation. We also found scaling relations between injection, cancellation, transaction, and diffusion of the mid-price, highlighting the correlation between these market events. We finally discussed a theoretical model based on our findings to reproduce the empirical order-book profiles.

The Relationship between a Unified Financial Condition Index and Major Foreign Currency Markets

This study proposes a unified financial condition index centred around the most popular financial conditions indices used in the US and tests its relationship with the most actively traded USD based foreign currency pairs, namely the British pounds, Japanese yen, Australian dollar, Canadian dollar, Chinese yuan and the Indian rupee. Using weekly data over 1993-2018, this paper proposes a Unified Financial Condition Index (UFCI) under a principal component analysis framework. The index captures 78% of the variability inherent in St Louis Federal Reserve Financial Stress Index, the Chicago Fed National Financial Condition Index and the Adjusted National Financial Condition Index. Significant p-value of UFCI, homoscedasticity and a relatively stable root mean squared errors were observed only for EUR/USD. Mixed findings, found as lags, were increased, suggesting a weak relationship between UFCI and foreign currencies. The UFCI forecasting model is compared with the VIX (volatility index) based model, and also a random walk model. Although the UFCI model was superior only for the Canadian dollar, Chinese yuan and Indian rupee after considering heteroscedasticity in errors, results were sensitive to the number of lags and insignificant p-values.

A study on the dynamics of exchange rate volatility spillover network: Evidence from Central Asia

Exchange rate volatility interacts closely with capital market prices and have a huge impact on import-export trade and foreign investment in the real economy. This paper adopted the VAR-based spillover index approach to explore the exchange rate risk contagion among belt-road countries. By taking Central Asian countries as example, we find that the internal interaction is extremely weak among Central Asian currency markets while the Kyrgyz currency plays a relatively important role in the entire region. Moreover, spillovers among Central Asian currency markets are inevitably influenced by major economic/political events, which needs further study in the future. Empirical results contribute to the policy making of regulators and trading behaviours of investors in the foreign currency market.

Macroeconomic factors affecting Exchange Rate-BRICS Countries

This paper basically gives us an empirical study of macro variables factors which affects the foreign exchange or currency market. Exchange rate is an imperative part of a country's economy. The foreign exchange is undergoing substantial changes over the period of time. The research is being directed with a specific end goal to find a connection between macro variables and exchange rate. The direct measure of expectations builds on the information that is contained in data from the foreign exchange market. This research inspects the impact of macro variables on the exchange rate of five different countries i.e. Brazil, Russia, India, China and South Africa. This study uses panel data regression methods to establish a relationship between this variable as well as its impact on currency market. So, here we are taking exchange rate as a dependent variables and independent variables such as GDP, imports, exports, CPI, Industrial Production and Total Reserve. It is significant to highlight that the macroeconomic arrangements must be executed so as to balance out and diminish the trade rates volatilities. Exchange rate also depends upon supply and demand from one country to other countries. For these reasons studying macroeconomic variables their impact on exchange rates are of utmost significance, which also helps to understand what, how and when these variables determine the exchange rates. There are also some other factors which also impact the exchange rate but are not taken into consideration. The research is based upon secondary data which is collected from different sources like World Bank, IMF etc.

Bank Foreign Currency Funding Gap and Currency Markets: The Case of Mexico Post GFC

Bank Foreign Currency Funding Gap and Currency Markets: The Case of Mexico Post GFC

Валютний ринок в Україні: проблеми та виклики (англ. мовою)

The article conveys the current state and dynamics of Ukraine currency market. As banks are deemed key currency market players the authors have shown macro-trends in the banking system reflecting banks' currency market activity. The authors also outlined influential factors of the Ukrainian foreign currency market and applied to the new normal concept as the reference point after the fundamental change of market conditions for further monitoring of the market development.

Influence of Uncertainty in Financial Markets on Import and Consumption

Objectives: This study has analyzed the influence of changes in financial market in Korea on the import and consumption as an object economic index. Methods/Statistical Analysis: Financial market has measured the historical changes on bond, foreign currency and stock market. On the other hand, import and consumption were calculated by using the changes in log value from final consumption of households and import amount of each service and goods. Findings: According to the result of analyzing the causal relationship by using the Granger causality test, volatility in financial market turned out to significantly influence on the import and consumption. As for bond market, a result has been derived that there was an opposite influence. As for impulse response function based on VAR model, it represents the influence of volatility in financial market on import and consumption in dynamic manner. In addition, variance decomposition of forecast error compares the relative explanatory power of volatility in financial market that accounts for distribution of import and consumption. Improvements/Applications: As for Korea, volatility in financial market turned out to be negative in import and consumption. According to the result of variance decomposition of forecast error, volatility in foreign currency market turned out to have the highest level of explanatory power on import and consumption.

Short-term volatility and the long-term trend of the Canadian dollar on the foreign currency market

Many factors affect the value of the Canadian dollar, such as expectations, commodity prices, budget and current account deficits, debt ratios, interest rates, political stability, and speculation. Because the Canadian economy heavily relies on foreign trade and investment, fluctuations in the value of the Canadian dollar have far-reaching implications for the nation's economic growth and stability. In this thesis, an attempt is made to understand the complex nature of the foreign currency markets and how the Canadian dollar has performed in the last three decades. The study has found that commodity prices, interest rate differentials, diverging inflation rates, and political events all have significant influence on the value of the dollar. The relative impact of each in part depends on the time horizon analysed.