7 September 2023
Authors: Juan Antolin-Diaz, Gino Cenedese, Shangqi Han, Lucio Sarno
Currencies that are more exposed to US monetary policy yield positive average excess returns. This result holds both for pure monetary policy shocks and for central bank information shocks, identified via sign restrictions on interest rate surprises using high frequency data. Currency characteristics help explain the heterogeneity of these exposures across currencies and time. We then build exposure indices to gauge this effect around policy announcements. Long-short trading strategies that condition on such exposure indices display significant excess returns after controlling for dollar, carry and momentum factors.