Impact of economic data surprises on exchange rates in the inter-dealer market

Our study of the short-term market impact of economic surprises on the inter-dealer FX market has investigated a total of 108 indicators in nine major countries. We confirm the findings of most analogous studies by showing that economic data releases have a significant directional impact on intraday exchange rate prices. Sixty-eight out of the 108 indicators we studied produced 95% significant elasticities on the exchange rate in the minute after the data release. We also find that US data releases tend to be the most consistent market movers with 16 out of the 18 indicators covered producing an effect on the USD at the 95% confidence level. On the other end of the scale are most Euro-Zone, Swiss and Japanese releases, which tend to produce small and uncertain market impacts. We also find that sensitivities to economic surprises tend to be more unevenly distributed outside the US with a small number of economic indicators producing very large market moves and most other economic releases having very little impact. For example, we find that market moves caused by Norwegian CPI and Australian and Canadian employment releases per one standard deviation of surprise have been higher in our sample than, for example, the moves caused by US GDP, trade balance or retail sales. In addition, we also found that, in the big economies like the US, UK, Japan, Euro-Zone and Australia, data shocks are almost instantly absorbed in the exchange rates, as the t-statistics of the regressions of FX change on economic surprises peak either in the minute of the release or the minute after. On the other hand, in Canada, Switzerland, Sweden and Norway we find that the relationship between FX change and the economic surprise is strongest about 3 to 5 minutes after the release, suggesting that it takes longer for the economic news to filter through the market. Finally, the results of our study also showed that market sensitivities to economic releases in most countries have increased somewhat between 2001 and 2006. The only exceptions to this are the elasticities for US and Euro-Zone data releases, which have remained at their respective high and low levels. The findings of our study contribute to the economic surprise literature by showing that the exchange rates of smaller economies such as Australia, Canada, Norway and Sweden also exhibit considerable volatility after economic data shocks, which is often higher than the market moves caused by the more widely followed US economic indicators. Additionally, we point out that economic shocks in the bigger economies such as the US, UK, Japan and Euro-Zone tend to get absorbed into the price more quickly than in the smaller economies, where the maximum market impact usually arrives 3 to 5 minutes after the release.