Unobservable Monetary Policy Surprises and Exchange Rates

The paper examines the effect of monetary policy statement shocks on exchange rates. I use Google's Natural Language tools to measure and track changes in the sentiment of FOMC and ECB post-meeting statements. The results reveal a negative relationship between the dollar's value and FOMC statement shocks. Investors sell (buy) the dollar when the sentiment of the FOMC statement is more positive (negative) than the previous one. This negative relationship could be explained by the special status of the U.S. dollar as a safe-haven currency and the significant effect of U.S. monetary policy on other countries' macroeconomic fundamentals. The value of the euro is positively related to ECB statement shocks. The size of the exchange rate response to statement shocks is comparable to that of term structure shocks. There is no material difference between the response of exchange rates in conventional and unconventional times. Statement shocks affect the exchange rates through the information channel.

Safe Haven Currencies

As other safe haven assets, safe haven currencies are sought by investors to mitigate financial risk when economic turbulence hits. Three major safe haven currencies are the US dollar (USD), the Japanese yen (JPY) and the Swiss franc (CHF). The euro is now in competition as an alternative safe haven currency. US dollar will remain the best safe haven currency in the short term and the best investment currency in the medium term. In every uncertainty of the US equity market as well as in the case of a decline of the US dollar, the investor may consider investing in a safe haven currency like the yen or the Swiss franc. Given the stability of Swiss government and financial system of the country, the increased foreign demand for the currency usually pushes the Swiss franc upward. There are number of factors, characterizing the dynamics in which the investors fall, rushing to the Japanese yen during periods of global risk aversion. Traders looked for refuge in the cryptocurrency because they cannot find refuge elsewhere.

Swiss Franc from the Croatian Perspective

In Croatia and other countries of Central and Eastern Europe, as a consequence of deep financial integration and abolition of capital controls, considerable loans to households indexed to the Swiss franc have emerged. Although all of researchers of the Swiss franc do not agree entirely on whether the Swiss franc is a safe haven currency, its property of continuous appreciation is commonly accepted. There was a continuous appreciation of the Swiss franc over the Croatian kuna. This paper examines the performance of several ARCH-based models for Swiss franc against the Croatian kuna on daily data sets within time period from 1997 to 2010. Evaluating the models through standard information criteria Component ARCH (1,1) is found to be the best-fitting model.