Survey Forecast

This paper presents new stylized facts about exchange rates and their relationship with macroeconomic fundamentals. We show that macroeconomic surprises explain, on average, about 70 percent of variation in nominal exchange rate changes at quarterly frequency. Using a novel present value decomposition of exchange rate changes that is disciplined with survey forecast data, we further show that macroeconomic surprises are also a very important driver of the currency risk premia component and explain about 50 percent of its variation. These surprises have even greater explanatory power during periods of economic downturns and financial uncertainty.