Tracking Exchange Rate Determinants amid the Pandemic

This paper investigates how exchange rate determinants and channels changed during the COVID-19 crisis. Compared to the Global Financial Crisis and non-crisis periods, the smaller interest rate differentials among major economies and large shocks to the real economy shed light on the importance of trade channels, while the impacts on the movements of the exchange rate through the portfolio investment channel appear to be smaller. Daily activity indexes developed from high frequency datasets including web-search data and electricity demand are used to track the movements of the exchange rate. After controlling interest rates and risk factors, the business activity of the home country and overseas are significantly associated with the exchange rate movement for the majority of the economies during the pandemic, though the directions of impacts are different between advanced and emerging economies. Higher safe haven demand tends to appreciate the yen during a crisis, but the effects via trade channels partially offset safe-haven effects, which is associated with the relatively stable yen amid the pandemic. The effects via trade channels could support a faster recovery of Japan's exports after the pandemic ends.