The relative term structure and the Australian-US exchange rate. Issue 3 (1st August 2016)

• Record Type: Journal Article
• Authors: Bui, Anh Tuan; Fisher, Lance A.
• Editors: Wagner, NiklasF; Steeley, James
• Is Part Of: Studies in economics and finance. Volume 33:Issue 3(2016)
• Publication Date: 2016-08-01
• Subjects: Economics -- Periodicals; Finance -- Periodicals; 330
• DOI: 10.1108/SEF-05-2014-0089
• Languages: English
• ISSNs: 1086-7376

Abstract

Abstract : Purpose: The purpose is to investigate whether the factors that summarise the information in the yield curves of Australia and the United States can predict changes in the Australian-US exchange rate (i.e. the AUD/USD rate) and Australian dollar excess returns. Design/methodology/approach: The paper extracts the three Nelson-Siegel factors (level, slope and curvature) from the relative yield curve of Australia with the United States to predict changes in the bilateral exchange rate and excess returns on the Australian dollar. The full sample regressions allow for a shift in the coefficient on the relative curvature factor which can account for the impact of the Fed's changed monetary policy to one of quantitative easing. Findings: The paper finds that the relative curvature factor strongly predicts changes in the AUD/USD exchange rate and Australian dollar excess returns out to 12-months ahead in the sample that precedes the Fed's policy of quantitative easing. The relative curvature factor retains its predictive power in the full sample regressions but anticipates smaller exchange rate changes and excess currency returns in in-sample predictions made from August 2007. Practical implications: The yield curves of Australia and the US reliably reflect investor's expectations about prospective monetary policies in each economy. Originality/value: The paper investigates the predictive content of the relative Nelson-Siegel factors for changes in the AUD/USD exchange rate and for Australian dollar excess returns over various forecast horizons for a period that covers the Fed's policy of quantitative easing.