Impact of central bank speeches on currency markets

A well-written and well-delivered speech can have the ability to motivate and mobilise millions of listeners.

More than 50 years since Martin Luther King delivered his “I have a dream” speech at a Washington civil rights’ march, the oration continues to hold timeless appeal and inspiration.

But what about a speech that focuses on economic growth, inflation, investment and employment rather than notions of freedom, equality and justice? 

The “power of words” is the theme of Dr Becksndale Masawi’s recently-completed PhD thesis in which he explores the impact of central bank speeches on currency markets.

Specifically analysing the effect that speeches from the Reserve Bank of Australia (RBA) and Bank of Canada (BOC) have on their respective exchange rates against the US dollar, Becksndale says he chose the subject because it’s not only topical but also carries significant policy implications.

‘The exchange rate is the most important price in any economy because it influences other prices such as inflation and interest rates. Central banks all over the world aim to maintain stable exchange rates and as such, intervene when deemed necessary, to keep the exchange rate under check,’ he explains.

Traditionally, central banks can directly intervene by using foreign currency reserves but he says empirical studies have shown this not to be effective strategy and many are now switching tactics.

‘Major central banks, especially in the developed economies, have now moved to indirect intervention by using communication as an alternative. Research in this area is still in its infancy so establishing efficacy of indirect intervention has great implication on policy making for central banks.’

With an established career in the global financial sector, Becksndale moved into academia 14 years ago and first taught in the UK before moving to Australia where he now works as a casual academic.

Wanting to extend his qualifications to a PhD, he chose to study at Deakin after working as lecturer in the Faculty of Business and Law.

‘Initially I considered writing a thesis on topic of risk in equity markets but after talking with my supervisor we decided on central bank communications … I’d studied economics and finance at both undergraduate and postgraduate levels and it soon became a topic I really grew to love over my candidature,’ he says.

Becksndale’s research makes a significant contribution to the current knowledge and literature as it takes a three-pronged approach by combining content analysis, information theoretic measures and an event study.

To identify and analyse the themes and concepts from the central banks’ speeches, he utilised Leximancer – a computer-aided data analysis software.

‘The analysis of the output of Leximancer, which uses information theoretic measures to infer whether the speeches reached financial markets, was novel,’ he says. ‘Further quantification of the speeches – using an information theoretic measure such as the Shannon index, which was pitted against exchange rates – also proved very insightful.’

One of the surprising results from his research, he says, was attaining results that seemed to be contradictory.

‘The expectation was that since I was studying two economies that are similar in many respects, the effect of central bank speeches was going to be the same. However it wasn’t.  I found there was no effect from RBA speeches but BOC speeches had an impact.’

Like many PhD students, he says that combining work, family commitments and study was one of major challenges of his candidature. However there were also many highlights including the award of “best presentation” at his first higher-degrees-by-research (HDR) colloquium and attending a number of research conferences.

‘Some of the notable ones were the Australasian Banking and Finance conference in Sydney, the Australia and New Zealand Academy Conference and, after I submitted my thesis, the Asia-Pacific Conference on Economics and Finance in Singapore. These conferences were very useful because it enables you to meet other researchers which widens your research scope and introduces a range of theories, research methodologies and analytical approaches,’ he says.

Becksndale is now in the process of informing the BOC about his research findings and is also planning on further research with the RBA to investigate which of its communication channel influences the exchange rate.

‘Central banks can now apply the findings from my research to their policymaking on currency market intervention … it also builds an important platform for further research into the topic.’

Becksndale’s advice for prospective PhD students is to focus on a doctoral thesis as marathon rather than a race. Appropriately, he says he also finds inspiration from of the world’s most memorable speechmakers, Sir Winston Churchill, who once said:  ‘Success is not final, failure is not fatal, it is the courage to continue that counts.’