Trade deficit surprises and the ex ante volatility of foreign exchange rates

We investigate the effects of US balance of trade deficit announcements on the ex ante volatility of foreign exchange rates. Specifically, we analyze the association between currency option implied standard deviation (ISDs) and the surprise component of monthly merchandise trade deficit disclosures. Our results indicate that larger surprises, regardless of their sign, are associated with increased currency ISDs. We also find that deficit disclosures, regardless of their content, temper market uncertainty on average. Finally, we find that larger than expected deficits tend to depreciate the US dollar. (JEL F31)