The Role of Country-pair-related News Sentiment in Foreign Exchange

Abstract

This article explores the relative, explanatory contribution of country-pair-related political and financial news to foreign exchange rates. Contributing political factors are measured through the sentiment scores of published news while contributing financial factors are measured through various economic indicators such as price and volume of USD and CNY oil futures, the Russian IMOEX Index, and corresponding interest differentials. The results show that news sentiment plays a minor role in exchange rate determination while other factors such as prices and traded volumes in oil future contracts and interest differentials are significant contributing factors to the exchange rate determination. Nevertheless, the quality and quantity of news coverage of geo-political or economic events seems to play an important role when it comes to the impact of news on exchange rates. Among the sentiment-analyzed currency pairs, EUR/USD exhibits by far the highest sensitivity to political and economic news, followed by EUR/RUB, RUB/CNY, EUR/CNY, USD/CNY, and USD/RUB.

Keywords

• foreign exchange
• news sentiment analysis
• text mining
• geo-political sentiment