Economic Data Surprises and Currency Alpha

Alessio de Longis and Eren Tufekci

In this chapter, we will investigate the impact of economic data surprises on currency markets. A surprise is defined as the difference between the actual release and consensus expectations for an economic statistic. After a brief review of the relevant literature, we distinguish between two channels via which data releases affect foreign exchange: a bilateral and a global effect. The bilateral effect is driven by local economic surprises from the two countries in a currency pair. For example, in the exchange rate between the Australian dollar and the US dollar, bilateral effects come from data releases in Australia and the US, where the relative performance between the two economies has a positive effect on the exchange rate through monetary policy expectations, interest rates and growth differentials. On the other hand, the global effect is driven by the influence that economic surprises from major countries (or regions) have on all currencies. Using the same Australian dollar and US dollar example, data releases from the US may have additional effects on the currency pair through their influence on global growth expectations, terms of trade, commodity prices, portfolio flows and