Monetary Policy and Currency Returns: The Foresight Saga

47 Pages Posted: 9 Jun 2017 Last revised: 27 Oct 2017

See all articles by Dmitry Borisenko

Dmitry Borisenko


Igor Pozdeev

affiliation not provided to SSRN

Date Written: October 24, 2017


We document a drift in exchange rates before monetary policy changes across major economies. Currencies tend to depreciate by 0.7 percent over ten days before policy rate cuts and appreciate by 0.5 percent before policy rate increases. We show that available fixed income instruments allow to accurately forecast monetary policy decisions and thus that the drift is foreseeable and exploitable by investors. A simple trading strategy buying currencies against USD ten days ahead of predicted local interest rate hikes and selling currencies before predicted cuts earns on average a statistically significant return of 42 basis points per ten-day period. We further demonstrate that this return is robust to the choice of holding horizon and monetary policy forecast rule. Our results thus pose a major challenge for the risk-based explanations of the exchange rate dynamics.

Keywords: Monetary Policy, Policy Expectations, Predictability, Overnight Index Swap, Foreign Exchange

JEL Classification: E43, E52, E58, F31, G12

Suggested Citation

Borisenko, Dmitry and Pozdeev, Igor, Monetary Policy and Currency Returns: The Foresight Saga (October 24, 2017). University of St. Gallen, School of Finance Research Paper No. 2017/08, Available at SSRN: or

Dmitry Borisenko

Independent ( email )

Igor Pozdeev (Contact Author)

affiliation not provided to SSRN

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