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THE NEWS-BASED APPROACH TO EXCHANGE RATES AND THE ECONOMETRICS OF SHORT-TERM TRADING

THE NEWS-BASED APPROACH TO EXCHANGE RATES AND THE ECONOMETRICS OF SHORT-TERM TRADING

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THE NEWS-BASED APPROACH TO EXCHANGE RATES AND THE ECONOMETRICS OF SHORT-TERM TRADING

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  1. THE NEWS-BASED APPROACH TO EXCHANGE RATES AND THE ECONOMETRICS OF SHORT-TERM TRADING Massimo Tivegna University of Teramo, Italy University of Greenwich ECON1083 Global Macroeconomics - Module 5 1

  2. COURSE OUTLINE • THE €-$ FOREX MARKET - HISTORY AND RECENT TRENDS slides • FROM MACROECONOMIC FUNDAMENTALS TO MACRO NEWS p. 1-5 • MACROECONOMIC SURPRISES – THE SCHEDULED NEWS p. 5-6 • INFORMATION SOURCES OF SCHEDULED NEWS slides • IMPACT ON EXCHANGE RATES OF SCHEDULED NEWS Tab. 2.1 • UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES p.7-8,Tab. • HOW TO MEASURE NEWS slides • A 3-ZONES ECONOMETRIC MODEL OF EXCHANGE RATES p. 9-12+slides • FROM SIMULATION TO TRADING – OPTIMIZATION p. 12-14 + slides • MEASURING AND EVALUATING PERFORMANCE p.14-25+slides

  3. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS A CHECKLIST OF THE FOREX MARKET General Features Instruments exchanged Trading Forecasting Techniques for trading Forex Market Microstructure The role of Central Banks and their operations

  4. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS GENERAL FEATURES Open 24 hours a day Quoting currency pairs Number and ranking of currencies Who trades, where, when, why, how Postwar history at glance Instruments exchanged Spot, Forward,Swaps,Futures, Options

  5. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS FROM MEDIUM TERM TO DAY-TRADING Position Trading with a Multicurrency Portfolio (several days) Hedging On Real and Financial Assets On Payables and Receivables For Offsetting Payments Flows For Asset Management Day-trading as a separate asset class

  6. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Forecasting Techniques for Trading Technical Analysis Snooping “professional” Behaviours and Hints (herding and insider trading) Rumours and news trading Econometric Models from Various Theories and Frequencies The LONG – SHORT terminology

  7. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Microstructure Order flows Payment and trading circuits (e.g.EBS,www.ebs.com) Trading over the Internet(e.g.Oanda,IG Markets, Saxobank, etc.) High-frequency information (e.g. Bloomberg, Reuters, Dow Jones, etc.) Online consulting services, free and fee (e.g. Forexfactory, Forexpros, RANsquawk, etc.) Carry trades

  8. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Role and Operations of Central Banks European Central Bank The Federal Reserve System, Fed Bank of England, The Old Lady Bank of Japan Reserve Bank of Australia

  9. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Notation: €-$ (EUR-USD) £-$ (STG-USD) From the “Legacy Currencies” to the Euro: The Role of the DM and the Bundesbank The Dimension of the Currency Market The Euro and the British Pound Cross exchange rates

  10. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS

  11. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS

  12. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS

  13. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Yen Depr. (15) US Tapering Issues (2) (8) (9) (16) (10) (13) (18) (5) (1) (24) (6) (22) (12) (3) (19) (14) (17) (7) (23) (11) (21) (4) (20)

  14. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS EVENTS 2008 – 2009 US official interest hikes in two stages US Dollar repatriation for the financial crisis and “safe heaven” flows into the US Dollar Lehman US official interest rates at zero Negative economic news in the Eurozone. ECB expected to lower official interest rates Reduction of ECB rates Quantitative easing (QE) announced by the Fed Persistent Dollar weakening A very rare statement by the Fed Governor Bernanke on $ weakness: big surprise First downgrade of Greece. Beginning of the Eurozone sovereign debt crisis

  15. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Yen Depr. (15) US Tapering Issues (2) (8) (9) (16) (10) (13) (18) (5) (1) (24) (6) (22) (12) (3) (19) (14) (17) (7) (23) (11) (21) (4) (20)

  16. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS EVENTS 2010 – 2011 11. Downgrades of Spain and Portugal 12. Hints of a second QE 13. Formal approval of a second QE by the Fed 14. Beginning of Ireland crisis and further downgrades 15. Sharp downgrades of Greece, Spain and Portugal: the P.I.G.S 16. ECB buys Italian and Spanish bonds 17. Approval by Eurozone Heads of State of the rescue fund EFSF 18. Further European and Greek problems

  17. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS Yen Depr. (15) US Tapering Issues (2) (8) (9) (16) (10) (13) (18) (5) (1) (24) (6) (22) (12) (3) (19) (14) (17) (7) (23) (11) (21) (4) (20)

  18. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS EVENTS 2012 – 2013 19 .Hollande victory in France. Two Greek elections. Further Eurozone difficulties 20. ECB Governor Draghi’s “ECB will do whatever it takes to preserve the Euro” 21. Improvement in the Greek economic outlook 22. A rare statement by Draghi on currencies 23. Solution of the Cyprus banking crisis 24. ECB official interest rates cut

  19. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS 50 51 43 40 49 44 42 47 39 48 41 38 45 46 37 36

  20. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS SEPTEMBER – OCTOBER 2013 36. ECB meeting. Draghi says interest rates will remain low for an extended period of time. 37. Nothing relevant. 38. Summers withdraws from the Fed race. FOMC surprises markets by maintaining QE. 39. Victory of Merkel in German elections. First hints of US shutdown. 40. Italy’s Premier Letta survives a no confidence vote. ECB meeting. First US closings. 41. Negotiations on US shutdown. Apparent agreement on Yellen nomination at the Fed. 42. Anomalous sharp revaluation of US $ upon the settling of the US shutdown. 43. Bad US payrolls delayed by the shutdown. 44. FOMC meeting without any hint of a continuation of QE. Very low inflation in Eurozone. Likely closing of long €-$ positions.

  21. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS 50 51 43 40 49 44 42 47 39 48 41 38 45 46 37 36

  22. THE €-$ FOREX MARKET – HISTORY AND RECENT TRENDS NOVEMBER – DECEMBER 2013 45. ECB cuts rates at regular meeting 46. Nothing relevant 47. Minutes of the of the FOMC with offsetting messages on tapering QE 48. Nothing relevant 49. ECB meeting 50. Nothing relevant 51. FOMC meeting: first steps away from QE. The Fed will reduce its monthly buying of US bonds from 85 to 75 billions per month.

  23. COURSE OUTLINE THE €-$ FOREX MARKET - HISTORY AND RECENT TRENDS FROM MACROECONOMIC FUNDAMENTALS TO MACRO NEWS MACROECONOMIC SURPRISES – THE SCHEDULED NEWS INFORMATION SOURCES OF SCHEDULED NEWS IMPACT ON EXCHANGE RATES OF SCHEDULED NEWS UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES HOW TO MEASURE NEWS IMPACT ON EXCHANGE RATES A 3-ZONES ECONOMETRIC MODEL OF EXCHANGE RATES FROM SIMULATION TO TRADING - OPTIMIZATION MEASURING AND EVALUATING PERFORMANCE 23

  24. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS

  25. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS

  26. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS

  27. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS

  28. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS

  29. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS

  30. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS We then have a first sight of some macrovariables which can be of interest to traders as they influence exchange rates. Relative output growth Relative inflation rates Relative money growth Interest rate differential Exchange rate forecasts and expectations

  31. FROM MACROECONOMIC FUNDAMENTALS TO MACROECON. NEWS What is missing: A policy reaction function and the decision process of monetary policy The complexities of financial markets (yield curves, stock markets fads, derivatives, etc.) The formation and changes of expectations in relation to new infomation The globalization of domestic financial markets The relation between different asset prices

  32. COURSE OUTLINE THE €-$ FOREX MARKET - HISTORY AND RECENT TRENDS FROM MACROECONOMIC FUNDAMENTALS TO MACRO NEWS MACROECONOMIC SURPRISES – THE SCHEDULED NEWS INFORMATION SOURCES OF SCHEDULED NEWS IMPACT ON EXCHANGE RATES OF SCHEDULED NEWS UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES HOW TO MEASURE NEWS IMPACT: A 3-ZONES ECONOMETRIC MODEL OF EXCHANGE RATES FROM SIMULATION TO TRADING - OPTIMIZATION MEASURING AND EVALUATING PERFORMANCE 32

  33. MACROECONOMIC SURPRISES-THE SCHEDULED NEWS • Macroeconomic news announcements (scheduled news) are defined as “surprise effects”, that is the difference between expectations and realizations • Data source for expected and realized announcements is Bloomberg • Units of measurements differ across economic variables. Standardized k-th news is given by

  34. MACROECONOMIC SURPRISES-THE SCHEDULED NEWS MAIN SCHEDULED NEWS IN ETZ ED ATZ 34

  35. MACROECONOMIC SURPRISES-THE SCHEDULED NEWS MAIN SCHEDULED NEWS IN ETZ ED ATZ 35

  36. MACROECONOMIC SURPRISES-THE SCHEDULED NEWS MAIN SCHEDULED NEWS IN ETZ ED ATZ 36

  37. MACROECONOMIC SURPRISES-THE SCHEDULED NEWS MAIN SCHEDULED NEWS IN ETZ ED ATZ 37

  38. COURSE OUTLINE THE €-$ FOREX MARKET - HISTORY AND RECENT TRENDS FROM MACROECONOMIC FUNDAMENTALS TO MACRO NEWS MACROECONOMIC SURPRISES – THE SCHEDULED NEWS INFORMATION SOURCES OF SCHEDULED NEWS IMPACT ON EXCHANGE RATES OF SCHEDULED NEWS UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES HOW TO MEASURE NEWS IMPACT: A 3-ZONES ECONOMETRIC MODEL OF EXCHANGE RATES FROM SIMULATION TO TRADING - OPTIMIZATION MEASURING AND EVALUATING PERFORMANCE 38

  39. INFORMATION SOURCES OF SCHEDULED NEWS Bloomberg, Reuters. The most reliable and expensive. ForexFactory has the best cost-quality ratio (but there could be equivalent ones) Find your favoured one and stick to it (but occasionally checking elsewhere). Establish (with experience) your metrics of the news impact as trading is a highly personal business.

  40. COURSE OUTLINE THE €-$ FOREX MARKET - HISTORY AND RECENT TRENDS FROM MACROECONOMIC FUNDAMENTALS TO MACRO NEWS MACROECONOMIC SURPRISES – THE SCHEDULED NEWS INFORMATION SOURCES OF SCHEDULED NEWS IMPACT ON EXCHANGE RATES OF SCHEDULED NEWS UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES HOW TO MEASURE NEWS IMPACT: A 3-ZONES ECONOMETRIC MODEL OF EXCHANGE RATES FROM SIMULATION TO TRADING - OPTIMIZATION MEASURING AND EVALUATING PERFORMANCE 40

  41. IMPACT ON EXCHANGE RATES OF SCHEDULED NEWSTHE NON-FARM PAYROLLS AND THE UNEMPLOYMENT RATE IN THE US LABOUR MARKET The US Non-farm Payrolls has by far the highest impact on world financial markets. It is the number of jobs added to the US economy outside the agricultural sector, in a highly flexible labour market. The impact is higher than that of Unemployment Rate and the two numbers come from different surveys.

  42. IMPACT ON EXCHANGE RATES OF SCHEDULED NEWSREACTIONS TO THE US NON-FARM PAYROLLS In the following two slides we have the €-$ reactions in the last two months: The first chart indicates a reaction to a 160.000 Expected and a 236.000 Actual with unemployment rate going down. The second chart indicates a reaction to a 165.000 Expected and a 157.000 actual, with unemployment rate going up.

  43. IMPACT ON EXCHANGE RATES OF SCHEDULED NEWSREACTIONS TO THE US NON-FARM PAYROLLSNFP on March 8: Exp. 160.000 vs 236.000

  44. IMPACT ON EXCHANGE RATES OF SCHEDULED NEWSREACTIONS TO THE US NON-FARM PAYROLLSNFP on February 1, 2013 Exp. 165.000 vs 157.000

  45. IMPACT ON EXCHANGE RATES OF SCHEDULED NEWSREACTIONS TO THE US NON-FARM PAYROLLSDelayed NFP on October 22, 2013 Exp. 180.000 vs 148.000

  46. IMPACT ON EXCHANGE RATES OF SCHEDULED NEWSREACTIONS TO THE US NON-FARM PAYROLLSNFP on November 8, 2013 Exp. 120.000 vs 204.000

  47. COURSE OUTLINE THE €-$ FOREX MARKET - HISTORY AND RECENT TRENDS FROM MACROECONOMIC FUNDAMENTALS TO MACRO NEWS MACROECONOMIC SURPRISES – THE SCHEDULED NEWS INFORMATION SOURCES OF SCHEDULED NEWS IMPACT ON EXCHANGE RATES OF SCHEDULED NEWS UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES HOW TO MEASURE NEWS A 3-ZONES ECONOMETRIC MODEL OF EXCHANGE RATES FROM SIMULATION TO TRADING - OPTIMIZATION MEASURING AND EVALUATING PERFORMANCE 47

  48. UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATES

  49. UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATESGRADUAL RESULTS OF THE ITALIAN ELECTIONS

  50. UNSCHEDULED NEWS AND THEIR IMPACT ON EXCHANGE RATESREACTION (MONDAY, JTZ) TO THE CRISIS OF THE MONTI GOVERNMENT IN ITALY (ON FRIDAY, IN ATZ)