FX Markets Move on Surprise News
Institutional Investor Trading Behavior around Brexit, the US Election, and the Swiss Franc Floor
In this inaugural JPMorgan Chase Institute report on financial markets, we examined three recent events that had major impacts on foreign exchange (FX) markets:
- The decision by the Swiss National Bank (SNB) to remove their floor on the Swiss Franc vs. Euro exchange rate (EUR/CHF): on January 15, 2015, at 9:30 a.m. GMT, the SNB abandoned its floor on the EUR/CHF exchange rate via a surprise press release. The announcement shocked the FX market—EUR/CHF dropped 12.3 percent over the next few hours.
- The Brexit referendum: on June 23, 2016, the United Kingdom (UK) held a referendum on whether the UK should remain a member of the European Union (EU). The “Leave” win led to an 11 percent drop in GBP/USD overnight.
- The 2016 US Presidential Election: On November 8, 2016, the United States (US) held its Presidential Election. The unexpected Trump victory led to an 8.3 percent rise in USD/MXN overnight.
All three events shared one important quality—they had unexpected outcomes that led to the largest one-day moves in these three exchange rates in the last 20 years—that made them ideal candidates for research aimed at building a better understanding of institutional investor trading behavior. With this research objective in mind, we examined institutional investor trades in FX markets in the days and hours leading up to, during, and after each event. We analyzed total trading volumes (a measure of trading activity) and net flows (a measure of risk transferred) across all institutional investors in our sample, and then examined net flows at the investor sector and region level. Finally, we looked at transactions within each investor type to observe within-sector variation in trading behavior.