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Banque Nationale De Belgique Sa — Investor Presentation (December 2024)

15 slides from Banque Nationale De Belgique Sa's investor presentation, Dec 20, 2024

1. Slide 1: US Interest Rate Surprises and Currency Returns

   US Interest Rate Surprises and Currency Returns 14th Workshop on “Exchange Rates” 20 December, 2024 Shangqi Han (Fulcrum Asset Management) Jointly with Juan Antolin-Diaz (London Business School) Gino Cenedese (Fulcrum Asset Management) Lucio Sarno (University of Cambridge and CEPR) Shangqi Han | 1 /

2. Slide 2: Introduction

   Introduction The influence of US monetary policy on exchange rates is a classic topic in international finance (e.g., Dornbusch, 1976). Identifying causal relation is challenging: Need to control for confounding factors that affect endogenous reaction of policy. Unexpected price reaction around cent

3. Slide 3: Our contributions

   Our contributions: Tackle identification challenge and separate monetary policy shock from central bank information shock ,→ We find that monetary policy and information shocks move currencies in opposite directions, ,→ Impact is heterogeneous depending on fundamentals. What is the economic magnitud

4. Slide 4: Currencies depreciate in reaction to positive US rate surprises

   Currencies depreciate in reaction to positive US rate surprises rit = µi + θi RateChangest + εit . Shangqi Han | 4 / 13

5. Slide 5: Identification

   Identification Structural vector autoregression (similar to Jarocinski & Karadi, 2020): A0 mt = εt , (1) mt is 2 × 1 vector of two high-frequency surprises variables (changes in interest rate and S&P 500); εt is a 2 × 1 vector of orthogonal, primitive shocks (monetary policy and central bank informa

6. Slide 6: Monetary policy surprises and structural shocks

   Monetary policy surprises and structural shocks US rate surprises: the first principal component of five interest rate changes in a narrow window around FOMC announcements (Nakamura & Steinsson, 2018). Identifying restrictions in the VAR model: High-frequency returns Monetary policy shock CB informa

7. Slide 7: We uncover heterogeneous response to different shocks

   We uncover heterogeneous response to different shocks Heterogeneity partly explained by currency characteristics (e.g. interest rate differentials). Shangqi Han | 7 / 13

8. Slide 8: Estimation of Time-Varying Exposure

   Estimation of Time-Varying Exposure We allow the effects of shocks on FX spot returns to vary both in the cross-section and time series. ∑ n ∑ n rit = θi Shockt + k γk Zit × Shockt + k βk Zit + Countryi + Meetingt + εit , (2) k=1 k=1 k Zit : five currency fundamentals may be linked to the policy sen

9. Slide 9: Heterogeneity in responses to shocks depends on characteristics

   Heterogeneity in responses to shocks depends on characteristics Dependent Variable: Spot Return Model: (1) (2) (3) Rate Changes MP Shock Info Shock NFA/GDP × Shocks 0.171 0.165 -0.123 (1.884) (1.979) (-1.530) Equity Beta × Shocks -0.090 -0.110 0.133 (-1.315) (-1.199) (2.625) Trade Centrality × Shock

10. Slide 10: Currency Portfolio Cross-Section Performance

    Currency Portfolio Cross-Section Performance We update the EXP indices monthly PL P2 P3 P4 PH with currency fundamentals, e.g.: Panel A: Rate Changes Exposure Portfolios Mean EXPRate -1.27 -1.09 -0.96 -0.78 -0.33 = θ̂iM P + (0.165 × N F A/GDPit + t EXPM it P Mean Return 0.41 0.55 0.22 -0.69 0.41 Std

11. Slide 11: Long-Short Currency Monetary Policy Exposure Strategies

    Long-Short Currency Monetary Policy Exposure Strategies Equally Weighted L/S EXP Strategies Rank-Weighted L/S EXP Strategies Rate MP Info Mix Rate MP Info Mix Carry Panel A: 01/2009-01/2023 Mean -0.08 2.81 5.35 4.00 0.71 2.12 3.88 2.92 3.66 t (-0.05) (1.44) (2.30) (2.08) (0.55) (1.40) (2.13) (1.85)

12. Slide 12: Long-Short Currency Monetary Policy Exposure Strategies (Cont.)

    Long-Short Currency Monetary Policy Exposure Strategies (Cont.) Shangqi Han | 12 / 13

13. Slide 13: Conclusion

    Conclusion We study the heterogeneous impact of US monetary policy on currencies around the world. Distill pure monetary policy from the contemporaneous information shock. Monetary policy and information shocks have offsetting effect on currencies. Characteristics help understand the heterogeneity o

14. Slide 14: Appendix

    Appendix & FULCRUM Shangqgi Han | 1/2

15. Slide 15: Significant alpha after controlling for FX factors

    Significant alpha after controlling for FX factors Rate MP Info Mix Rate MP Info Mix Panal A: Equally Weighted L/S EXP Strategies Panal B: Rank-Weighted L/S EXP Strategies Three-Factor Model: Dollar, Carry, Momentum α −0.481 1.566 2.918 2.195 0.317 1.335 2.017 1.653 (−0.358) (1.147) (2.536) (2.281)

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