The Dollar Ahead of FOMC Target Rate Changes

Category: Finance Brown Bag Seminar
When: 30 November 2016
, 02:00
 - 03:00
Where: HoF E.01
Speaker: Nina Karnaukh

Authors: Nina Karnaukh (University of St. Gallen)

Title: The Dollar Ahead of FOMC Target Rate Changes

Abstract: I find that the U.S. dollar appreciates over the two-day period before contractionary monetary policy decisions at scheduled Federal Open Market Committee (FOMC) meetings and depreciates over the two-day period before expansionary monetary policy decisions. The federal funds futures rate forecasts these dollar movements with a 22% R2. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. A simple trading strategy, which exploits this predictability, exhibits a 0.93 Sharpe ratio. My findings imply that information about monetary policy changes is reflected first in the fixed income markets, and only later becomes reflected in currency markets.