An Introduction to Foreign Exchange Market News:
Foreign exchange market news has a direct impact on theexchange rate via induced transactions. This happens because foreign exchange market news increases order flow volatility.
Induced order flow accounts for two thirds of the total price effect and rest of the influence is channelized through direct news effects. Existing literature also acts as a explanatory variable to solve the puzzle of missing foreign exchange market news effects.
Ways in which market participants react to Foreign Exchange Market News:
Researches have proved that there is a statistically significant correlation between daily movements in major foreign exchange rates (such as that of US dollar to Euro) and foreign exchange market news.
However the response may be delayed and/or asymmetric. Also it has been evident that the reaction to bad news is quicker and more intense than that in case of a good news. This indicates that foreign exchange market players behave psychologically, are risk averse, and are followers rather than leaders.
Information pertinent to the pricing of foreign currency is clearly reflected by the spot market rates. Micro-based models depend on the trend shown by foreign exchange market news to generate empirical predictions.
Dealers can get the news related to fundamentals either directly or indirectly. The news that runs through direst channel is the common knowledge(CK). CK news is watched by all dealers and the unambiguous information is instantly transformed into the price of a currency that they quote. CK news mainly consists of macroeconomic announcements such as recent changes in GDP, unemployment, industrial production etc.
The indirect news on the other hand permeates through order flows. The foreign exchange market news on economic activity correlated with fundamentals pervades through dispersed information. This dispersed information progresses to the foreign exchange market and then to individual dealers via the customer order flows. Interdealer order flow ensures that the information is diffused to other dealers and thus gradually to the whole market.