Foreign Exchange Fixings and Returns Around the Clock

Abstract

The U.S. dollar appreciates in the run-up to foreign exchange fixes and depreciates thereafter, tracing a W-shaped return pattern around the clock. Return reversals for the top nine traded currencies over a 21-year period are pervasive, highly statistically significant, and imply daily swings of more than one billion U.S. dollars based on spot volumes. Using natural experiments, we show the existence of a published reference rate determines the timing of intraday return reversals. We present evidence consistent with an inventory risk explanation whereby foreign exchange dealers intermediate an unconditional demand for U.S. dollars at the fixes.

Keywords: foreign-exchange, fixings, high-frequency returns, inventory management, intermediation

JEL Classification: F30, F31, G15,