The Determination Of RMB Exchange Rate

Using event study with high-frequency tick data from Chinese foreign exchange market,this paper examines the impact of monetary policy adjustments of the People’s Bank of China(PBC) and the Reserve Bank of Australia (RBA) on RMB spot exchange rates against AUD.Based on the assumption of market efficiency, only the surprises component of an actualpolicy change or information disclosure can be "news" in the financial market. Thus wedisentangle the surprise component from the actual monetary policy change andmacroeconomic announcement. We find that the responses of RMB exchange rate to monetarypolicy adjustments of both the PBC and the RBA are significant and instantaneous. Strongermonetary news effects are observed under the RBA’ monetary policy, the volatility ofAUD/CNY exchange rate tends to decay within50minutes after the announcement time. Weillustrate that disentangle the surprise component from the actual monetary policy change canlead to a biased, even to a false result. Utilizing EGARCH model and a dataset consisting of30-minute AUD/CNY returns from October5,2010through September11,2012, we examinethe reaction of AUD/CNY returns and volatility to scheduled macroeconomic announcementsof China and Australia. We find the presence of asymmetric effect of macroeconomicannouncements on AUD/CNY volatility. We also find that pronounced announcement effectsof Chinese PPI, GDP and Australian unemployment rate, CPI, PPI, BOT and GDP news onAUD/CNY returns are observed. Announcement surprises of Chinese PPI and GDP, AustralianBOT and GDP impact the volatility contemporaneously and induce the volatility to last longertime. At last, our empirical analysis results show that monetary policy adjustments andmacroeconomic variables from China and Australia affect AUD/CNY market really.Meanwhile interest rate marketization is extremely urgent for China after the comparison ofChinese and Australian monetary policy effect.