occured in macroeconomic factors, the trend of these variables and their fluctuations must also be included. Therefore, we will look at each of these macroeconomic variables: 1. Commodities prices: Since countries usually export or import commodities such as oil, precious metals, basic metals, etc., whenever the price of each of these commodities changes in the world market, it will affect on the exchange rate of that country. For example, if oil prices rise in the global market, because oil is one of the main inputs, production cost cannot be reduced in the short term. That is, in the short term, the demand for this commodity is unchanged. Therefore, a country like the United States, which is the main importer of oil in the world, needs to pay more for this commodity in the world. At the result, the supply of USD and its demand for the currency of oil-exporting countries increases. This will reduce the value of the US dollar and increase the currency value of oil-exporting countries. 2. Interest rates: The foreign exchange market and the bond market are closely interrelated. If the central bank issues bonds to curtail monetary policy, the price of bonds reduces and interest rates will increase. In this case, people reduce their demand for money. Then they reduce their demand for domestic and foreign goods. As a result, the value of the currency of that country increases. In this article, Benita and Lauterbach (2004) investigate the relationship between exchange rate’s fluctuations, interest rates, and the degree of government intervention, and it concludes that the higher the exchange rate fluctuations in a country, the higher interest rates and government involvement in the economy. 3. Inflation: One of the main factors influencing the exchange rate is inflation in the country and its trading partners. If inflation in a country increases, the price of domestic goods will increase compared to the price of foreign goods. Then demand for foreign goods increases and demand for domestic goods will decrease.it lead to reduce exports and increase its imports increase in the exchange rate. On the other hand, inflation may have a positive impact on the exchange rate, as it pushes central banks to raise rates in order to prevent inflation rising. 4. Trade Balance and Budget Deficit: A country with a high level of demand for international goods and services will typically see a rise in the exchange rate. An increase in demand for the Australian dollar has led to an upward pressure on its currency. High-budget deficit countries are net buyers or importers of international goods. This lead to sale of their currency to pay for imported goods by buying foreign currencies. In other words, this has a negative impact on their currency. 2 5. Government Financial Policies: Government tools for applying financial policy are tax rates, price and non-price tariffs on imports of foreign goods. Each of these changes, it affects the country’s export and import and, consequently, the exchange rate. 6. The employment, retail index, manufacturing production index, housing market, and factors like these contain important information about the current and expected health of the economy and its currency. Because consumer spending and demand are closely correlated with their employment status. For each of factors above, we identify the proxy or index and then we analyze its current and past status. Since our purpose is to predict volatility changes of currency, we need to consider changes in these series: We want to assess the factors affecting the USD / euro exchange rate: 1 1.2 1.4 1.6 USD/EURO 01jan2008 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 3 -.1 -.05 0 .05 .1 USD/EURO change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 4 Inflation: Personal Consumption Expenditures (PCE) change -.1 0 .1 .2 .3 PCE change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date -.5 0 .5 1 PERSONAL SPENDING change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 5 Commodity price or its storage: like Natural Gas price or its storage The change in the number of cubic feet of natural gas stored last week in underground storage. While this is an indicator for the United States, it has the largest impact on Canadian currency due to Canada’s significant energy sector. Housing market; Pending Home Sales m/m OR Existing Home Sales or NAHB Housing Market Index/ Building Permits: This indicator reflects the health of the economy because the sale of a home has a great impact. For example, new owners do rebuilding; the mortgage is given to homebuyers by the financing bank and paid transaction to the broker. Therefore, the larger the index, the higher the value of that currency would be. Since this index is published monthly, it can be estimated in the past months to predict its value in the coming month. On the other hand, the home sales index last month, with the exception of new homes, has a major impact on the economic situation. A homebuilder is an indicator of over 50, showing a favorable outlook on home sales and below 50 negative prospects in the housing market. In a survey of about 900 homebuilders, respondents are asked to evaluate the relative level of sales of singlefamily homes in the present and future; this index is an excellent assessment of future construction activities, since obtaining a license is one of the first steps in building a new building. -1.5 -1 -.5 0 .5 existing home sales change 01jan2010 01jan2012 01jan2014 01jan2016 date 6 Trade Balance: Difference in value between imported and exported goods and services A positive number indicates that goods and services are exported more than imports; demand for exports and currency demand are directly related. Because foreigners should buy domestic currency for export payments. On the other hand, demand for exports also affects the production and prices of domestic products. FOMC Member Powell Speaks: Federal Reserve Members of the FOMC will share their votes to determine the key interest rates of their country. They often speak in the media to distract public attention about future monetary policy; therefore, the release date of these lectures is important for predicting future exchange rate trends. These times can be considered as a dummy variable in the regression. Employment: Number of job openings during the reported month, excluding the farming industry -.2 -.1 0 .1 .2 building permit change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 7 IBD/TIPP Economic Optimism or IBD/TIPP Consumer Confidence: A survey of 900 consumers calls on respondents to assess the relative level of economic conditions, including the six-month economic outlook, personal financial perspectives, and confidence in federal economic policies; -.5 0 .5 job opening change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 8 -10 -5 0 5 economic optimism change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date -6 -4 -2 0 2 4 consumer confidence change 01jan2010 01jan2012 01jan2014 01jan2016 date 9 Manufacturing Index: Philly Fed Manufacturing Index This index shows that the economic situation is improving. Because the business reacts quickly to the market conditions and the change in their reaction can be a primary signal of the prosperity of future economic activities such as demand, recruitment, and investment. If the value is higher than zero, it indicates a good economic condition and, if it is less than zero, indicates a deterioration of the economic situation. NFIB Small Business Index: Small companies that are defined as an independent company with the purpose of profit comprise between 1 and 250 people, except for its owners. In a survey of small businesses, respondents are asked for a relative level of economic conditions Including the labor market, inventory and sales, capital costs, inflation, income and wages, and credit markets. -40 -20 0 20 40 Manufactoring Index 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 10 Unemployment rate: Unemployment Claims The number of people first introduced for unemployment insurance last week; this is the country’s first economic information to be published, and its impact on the market varies weekly. In this case, when traders need to recognize recent economic developments, they tend to focus on releasing this information. The number of the unemployed is an important sign of the health of the general economy, since consumer spending and demand are closely related to the employment situation. Unemployment is also a major concern for those who control the country’s monetary policy. Producer Price Index (PPI): Core PPI A change in the price of products and services sold by manufacturers other than food and energy; if the real value exceeds the “forecast”, there will be a positive impact on the value of money. This index indicates a rise in consumer prices. Because when the manufacturers spend on more goods and services, these higher costs are usually passed on to the consumer. Federal Budget Balance: -5 0 5 10 small business index change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 11 Difference in federal government revenues and expenditures in the past month. If this number is positive, it indicates the federal budget surplus and, if negative, represents the federal budget deficit. Therefore, the larger it has a positive impact on the value of the currency. Retail Sales: Change in the total value of sales at retail sales; This index is the first and most extensive look at the information of important consumer costs and forms the majority of total economic activity. -400 -200 0 200 400 federal budget balance change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 12 Bank Holiday Most Forex trader are open every day except Christmas and New Year. Holiday and bank holiday programs are slightly different; Banks include the majority of the currency stock. When they are closed, the market is less liquid, and traders are more influential in the market. It can also lead to both abnormal and high volatility, so it can be considered as a dummy. Business Inventories: Changes in the total value of goods in the inventories of wholesalers and retailers; this is a signal to increase future business expenses, as companies are likely to buy their goods after they have depleted their assets. Import Prices m/m: Import Price Index Changes in the price of imported goods and services; If this measure is larger than the forecast, it has a positive impact on the value of currency. This is one of the factors driving up inflation for businesses and consumers, especially for those who are heavily dependent on imported goods and services. -1 -.5 0 .5 1 1.5 Retail Sales change 01jan2010 01jan2012 01jan2014 01jan2016 01jan2018 date 13 Crude Oil Inventories/ Crude Stocks: The change in the number of barrels of crude oil in the last week business inventory; while this is an indicator for the United States, due to its significant Canadian energy sector, it has the large impact on Canadian currency. It affects the price of petroleum products and, as a result, inflation, but also affects economic growth, as many industries rely on oil production. TIC Long-Term Purchases/ Net Long-term Securities Transactions. The difference between the value of long-term bond issued by US citizens and the value of US long-term bond issued by foreigners in the reported period; For example, if foreigners have bought US $ 100 billion in US stocks and bonds and the United States would buy $ 30 billion in stocks and bonds of another country, its net worth of 70.0 billion. Demand for domestic securities and currency demand is directly related. Because foreigners should buy domestic currency to buy the country’s securities Note: Due to the large amount of data, I give up some of my figures and tables. 14 Studies shows that the exchange rate volatility follows the GARCH process, and according to this model, the exchange rate is consistent and serial correlation. Rit = Sit ? Sit?1 Sit?1 Rit is the rate of change of the national currency against foreign currency. Exchange rate fluctuations are defined as standard deviation Rit in period t. Since some of our variables are monthly MVOLt , and some are quarterly QVOLt , we need to define the fluctuation of the exchange rate both monthly and quarterly. We obtain the interest according to Fisher equation: RIRit = 1 + rCBit 1 + ?it ? 1 One of the other factors influencing the volatility of the foreign exchange rate is fluctuations in the stock market in the country, which indicates uncertainty about the future economic situation. The fluctuations of the stock market and the foreign exchange market interrelated. log(VOLjt) = ?j + ?iXijt + ejt The first term is the logarithm of exchange rate fluctuationXij, i is the explanatory variable in country j. 15 The results of the GARCH regression estimation with the above explanatory variables are presented in the following table: (1) (2) VARIABLES coefficient coefficient Building permit change 0.0240 (0.0840) Personal Consumption Expenditures (PCE) change -0.0261 (0.0564) Consumer confidence change 0.00206 (0.00228) Existing home sales change -0.00164 (0.0158) Job opening change 0.00151 (0.0289) Economic optimism change -0.00144 (0.00176) Small business index -0.00499** (0.00207) Federal budget balance 7.97e-06 (3.03e-05) Retail sales change 0.0166** (0.00804) Import prices change 0.00243 (0.00428) Manufacturing index -0.000223 (0.000422) Trade balance -0.00104 (0.000768) L.arch 4.36e-08 (0) L2.arch 4.36e-08 (0) L3.arch 4.36e-08 (0) Constant -0.00585 0.000657*** (0.00721) (0.000120) Observations 72 72 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

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