The effects of co-movement, macroeconomic announcement dates and major events on foreign exchange: the case of the Australian dollar and other selected currencies

This paper investigates on the co-movement of the Australian Dollar (AUD) with the Euro (EUR), Pound (GBP), Yen (JPY) and New Zealand Dollar (NZD), the effects of macroeconomic announcement date on the AUD’s return and volatility, and also the effects of major events, namely the Brexit and 2016 U.S presidential election on the return and volatility of the currencies mentioned. All currencies selected are paired up with the USD and are termed as AUD/USD, EUR/USD, GBP/USD, JPY/USD and NZD/USD. The effects and relationship of these three studies are modelled using the GARCH (1,1) model as it is parsimonious and sufficient in capturing the time series’ volatility. The results of all three studies show that indeed the data could mostly fit into the GARCH (1,1) model and those which can’t can still be modelled using GARCH, albeit at a higher level such as (4,2) and (7,1) The results show that there are indeed co-movements between the AUD/USD and the currency pairs mentioned where the currency pairs influence the returns and volatility of the AUD/USD significantly. Out of the four macroeconomic announcement dates (Australian GDP and Employment and U.S GDP and Employment Dates), only the Australian Employment date causes statistically significant return whereas all of dates cause significant volatility persistence in the movement of the AUD/USD Between Brexit and the 2016 U.S Presidential Election and Appointment, the U.S event causes more significant returns and volatility in the selected currency pairs. These two events are rather recent so this report aspires to add on the limited literature on these events. This study aims to provide insights for currency traders and businesses which use the Australian Dollar and also the currencies mentioned so that they could better plan on their currencies’ position