Macroeconomic Implications of the Beliefs and Behavior of Foreign Exchange Traders

Yin‐Wong Cheung · Menzie Chinn

69 citations0/0 files storedNational Bureau of Economic Research

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Abstract

We report findings from a survey of United States foreign exchange traders. Our results indicate that (i) technical trading best characterizes about 30% of traders, with this proportion rising from five years ago; (ii) news about macroeconomic variables is rapidly incorporated into exchange rates; (iii) the importance of individual macroeconomic variables shifts over time, although interest rates always appear to be important, and; (iv) economic fundamentals are perceived to be more important at longer horizons. The short run deviations of exchange rates from their fundamentals are attributed to excess speculation and institutional customer/hedge fund manipulation. Speculation is generally viewed positively, as enhancing market efficiency and liquidity, even though it exacerbates volatility. Central bank intervention does not appear to have a substantial effect, although there is general agreement that it increases volatility. Finally, traders do not view purchasing power parity as a useful concept, even though a significant proportion (40%) believe that it affects exchange rates at horizons of over six months.

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References

1990Noise Trader Risk in Financial Markets 1976Expectations and Exchange Rate Dynamics 1983Empirical exchange rate models of the seventies 1982Interest rates and currency prices in a two-country world 1998Deutsche Mark–Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies 1996The Case for Flexible Exchange Rates 1992The use of technical analysis in the foreign exchange market 1995Exchange rates and fundamentals: Evidence on long-horizon predictability

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2007The Effectiveness of Foreign Exchange Intervention in Emerging Market Countries: Evidence from the Czech Koruna 2015Investment Strategy Optimization Using Technical Analysis and Predictive Modeling in Emerging Markets 1999Intraday Technical Trading in the Foreign Exchange Market 2003Official Intervention in the Foreign Exchange Market 2000Private or public information in foreign exchange markets? An empirical analysis 2001

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