Cut to the Chase (for FX)

It is not news that news moves financial markets. This blog will publish research on how, when, why, and which news moves what financial markets.

Suppose you are a trader or a risk manager with exchange rates being a significant holding in, or a significant risk factor for, your portfolio. Which announcements should excite or worry you?

The table below provides the answer. By showing the R²’s in a heat map that defines strong correlations as R² > 0.5 (and shows them as red), medium correlations as 0.2 ² <>2 <>

Exchange rate are Australian Dollar (AUD), Canadian Dollar (CAD), Swiss Franc (CHF), Euro (EUR), British Pound (GBP), Japanese Yen (JPY). Euro is EUR/USD and GBP is GBP/USD. All of the others are defined as the converse, for example USD/CAD.

Heat Map of Correlations for Exchange Rate Responses to Announcements

	GDP	HICP	IJC	ISM	ITB	NFP	RSX
AUD
CAD
CHF
EUR
GBP
JPY

And here is the legend for the announcements (across the top):

• RSX - U.S. Retail Sales (excl. autos)
• IJC - U.S. Initial Jobless Claims
• NFP - U.S. Non-Farm Payrolls
• ITB - U.S. International Trade Balance
• ISM - ISM Manufacturing PMI Index
• HICP - Eurozone HICP Inflation Index
• GDP - U.S. Gross Domestic Product (Advance release)

The Advance GDP release is obviously very important in the foreign exchange market. It should be noted that being quarterly there are few observations for GDP announcements and so the results should be taken with some caution. The international trade balance (ITB) also has a very strong influence. Non-farm payrolls is also an important announcement.