Exchange Rate Response to Macro News: Through the Lens of Microstructure

This study investigates the micro effects of macro news using customer price-contingent orders (i.e. stop-loss and take-profit orders) data from a large foreign exchange dealing bank in the pound/dollar market. Results reveal that price-contingent order placement intensifies 3 to 5 hours prior to the news events. I examine the link between this surge in order placement and the exchange-rate jump following the announcement. I find that price-contingent orders can enhance our ability to explain post-release exchange-rate returns by half. Furthermore, the estimated effect of orders is orthogonal to the news surprises. This implies that there may be a component of the news response that purely reflects institutional features such as order types and not necessarily the public information itself.