FX Markets Move on Surprise News Institutional Investor Trading Behavior Around Brexit, the US Election, and the Swiss Franc Floor

Abstract

In this JPMorgan Chase Institute report, we examined three recent events that had significant impacts on foreign exchange (FX) markets: the decision by the Swiss National Bank to end their minimum exchange rate policy on January 15, 2015, the Brexit referendum on June 23, 2016, and the US Presidential Election on November 8, 2016. All three events shared one important quality — they had unexpected outcomes that led to the largest one-day moves in the relevant 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. First, we find that FX trading volumes for hedge funds, asset managers, and banks spiked during the three events. In contrast, volumes for the corporate, pension/insurance, and public/other investor sectors barely increased. Second, institutional investors traded significant amounts of FX risk during the events, but their net flows alone cannot explain the sharp exchange rate movements during the repricing periods. Third, only hedge funds consistently transferred risk immediately after news broke and as currencies repriced sharply. Other investors transferred risk but only after exchange rates stabilized. Fourth, the active investor sectors played different roles in each event: During the SNB event, they all bought CHF, trading in the direction of the prevailing move in exchange rates; during the Brexit event their net flows were mixed; and during the US Election event they bought MXN, trading against the prevailing move in exchange rates. Fifth, within each investor sector, there was considerable variation in trading behavior during each event. Finally, banks and hedge funds traded higher volumes outside of their normal business hours and outside of a currency’s local market; other investor sectors did not. Our results are informative for policy discussions along two dimensions: financial market stability and central bank communications. The report leverages a new data asset that includes nearly 400 million institutional investor transactions across all asset classes, sourced from the Markets division of J.P. Morgan’s Corporate & Investment Bank. The analysis in this report is based on 120,000 spot and forward FX transactions in Swiss Francs (CHF), the Pound sterling (GBP), or the Mexican Peso (MXN) that were executed in the hours before, during, and after news broke for each event.