Foreign exchange market

About: Foreign exchange market is a research topic. Over the lifetime, 6661 publications have been published within this topic receiving 153384 citations. The topic is also known as: forex & FX.

Recent Exchange Rate Experience and Proposals for Reform

Abstract: The paper reviews the grounds for fears that foreign exchange markets are not behaving as well as they should: recent misalignments and crises, and seven sets of academic findings. (1) Exchange rate volatility is high, (2) with possible adverse effects. (3) Volatility cannot be explained by observable fundamentals, (4) and changes when the regime changes, even without a change in volatility of fundamentals. (5) Expectations appear to be biased. (6) Short-term expectations are destabilizing. And (7) the effect of changes in monetary policy on the exchange rate is drawn out over time, and is not instantaneous.

Exchange Rate Changes and Net Positions of Speculators in the Futures Market

Abstract: * Economists, taking a cue from currency traders, are looking at transaction-related data sets to enhance their understanding of short-term exchange rate dynamics. One such data set, often cited by private sector analysts, is the net positions of speculators in the futures market. * The authors' analysis of weekly net position data from the Chicago Mercantile Exchange since 1993 reveals a strong contemporaneous relationship between weekly changes in speculators' net positions and exchange rate moves. Specifically, by knowing the actions of futures market speculators over a given week, an observer would have a 75 percent likelihood of correctly guessing an exchange rate's direction over that same week. * However, net positions do not appear to be useful for anticipating exchange rate moves over the following week. * Policymakers can use net position data as a quantitative measure to complement their broader assessments of foreign exchange activity. 1. INTRODUCTION When pressed to explain short-term exchange rate movements, economists typically point to the seminal article by Meese and Rogoff (1983). (1) The authors conclude that exchange rate models do a poor job of tracking movements over short horizons. So, while the variables in macroeconomic models--such as interest rates, prices, and GDP--can explain exchange rate changes over medium and long horizons, they are not useful for tracking rate changes on a daily, weekly, or monthly basis. After twenty years, the Meese and Rogoff article for the most part still defines the conventional wisdom in this field of economics. (2) Currency traders and other market participants who focus on the short-term horizon look beyond macroeconomic models. They search for signs of short-term changes in the demand for currencies, using any available measures of market transactions and behavior. Indeed, over the past few years, this focus on transaction-related data sets has led some economists to consider using such data to model short-term exchange rate dynamics. This approach to understanding exchange rate movements may also be of interest to policymakers, who want to understand what drives the changes over relatively short periods. While one can cite the major economic, financial, and political developments over such intervals, these factors alone generally do not explain exchange rate movements very well. Accordingly, any publicly available data that can shed light on short-term changes in demand merit examination. In this article, we pursue a transaction-oriented line of research to help track short-term exchange rate movements. By examining a publicly available data set well known to currency market analysts--net positions held by speculators in the futures market--we are able to document a strong empirical relationship between changes in speculators' net positions and changes in exchange rates. We find that by knowing what speculators on the Chicago Mercantile Exchange did over the course of a week, an observer would have a 75 percent chance of guessing correctly an exchange rate's direction during that same week. We also provide evidence that the connection between net positions and exchange rates is strong and stable: From 1993 to 2003, weekly changes in the net positions of speculators can track 30 to 45 percent of exchange rate movements of the major currencies over the same week. We do not find, however, that the position data can predict the exchange rate changes over the following week. To add some perspective to our findings, we present a framework in which speculators in the futures market are constantly interpreting public and private information about ongoing shifts in foreign currency demand as they develop their directional views. We argue that net positions change when speculators, acting on their interpretation of public and private information, bet that underlying demand will move exchange rate values from their prevailing levels. …