Bi-National News Effects and Exchange Rate Futures: The Case of Canadian Dollar Futures Contracts

Abstract

This study provides new evidence on the effects of macroeconomic news announcements on the Canadian dollar futures price. Previous work on foreign exchange futures has focused only on the impact of U.S. news, ignoring the bi-national character of information flows that affect exchange rates. The study highlights the bilateral nature of exchange rates proving that both U.S. and Canadian news announcements affect the price of the futures contract. Since both countries markets operate with the same trading hours, linking both countries' news to market prices is more straightforward than in the case of other exchange rate futures contracts that are linked to the U.S. dollar (such as the EURO or the YEN). We find that news from both countries is shown to significantly affect futures prices. Noteworthy are U.S. housing starts, leading indicator and to a lesser degree federal funds rate and merchandise trade deficit. The Canadian news announcements that were found to be most significant was the official bank rate change followed by Canadian unemployment and Canadian Building permits. While announcement day volatility is shown to persist throught the trading day, we also show departures from mean variance that do not coincide with any of the announcements.