How Does Geopolitics Affect Currency Movements? Some Evidence from the ICRG.
PRS’ prop trading watches currency movements, and especially how forms of geopolitical risk affect fx rates. There’s a significant literature on this topic using our ICRG risk metrics. This is especially relevant given movements in the Indian rupee (in response to trade talks with the US) and the Canadian dollar for similar reasons.
In this latest piece published in Economic Letters, the authors looked at exchange rate reactions to international organization loans and geopolitical preferences using an unbalanced panel of 153 countries observed from February 1993 to December 2019.
Among the findings: “…a better score in the [ICRG]“Internal conflict” variable, representing less internal conflict, is associated with exchange rate appreciation at all time horizons. At the 2-month horizon, the shock produces a short-lived and sizable monthly depreciation of the exchange rate of around 2 percent.”
(https://www.sciencedirect.com/science/article/pii/S0165176525000497)
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