Global currency risk factors continue to explain a large share of the variation in the Canadian dollar during the period following the 2008–09 global financial crisis. We show that they are also systematically important for risk premiums, and only in recent months has the role of idiosyncratic country-specific risks grown.
We break down the exchange rate based on an explicit link between fixed income and currency markets. We isolate a foreign exchange risk premium and show it is the main driver of the exchange rate between the Canadian and US dollars, especially on monetary policy and macroeconomic news announcement days.
We document a new empirical finding in the foreign exchange market: currency returns show systematic reversals around the benchmark fixings. Specifically, the US dollar, on average, appreciates in the hours before fixes and depreciates after fixes.
