How the Exchange Rate Reacts to Google Trends During the COVID-19 Pandemic

Abstract

This study investigates the nonlinear impact of the COVID-19 pandemic on the exchange rates of Great Britain Pound, European Euro, and Chinese Yuan against the US$ (USD) which become the most tradeable currency pairs in recent years. Various COVID-19 indicators, namely the number of COVID-19 cases and deaths and Google Trends are considered in our analysis. Google Trends is relevant as it allows us to evaluate the panic and fear of investors during this pandemic. We utilize the Markov Switching regression model to divide the foreign exchange markets into the depreciation and the appreciation regimes. The results show that although there exists a similar sign of the COVID-19’s impact on the foreign exchange markets under two different regimes, the magnitude of the impact of COVID-19 in the depreciation regime is greater than the appreciation regime. Moreover, we found that the number of COVID-19 cases and that of COVID-19 deaths can positively affect the exchange rates(depreciation), while Google Trends is likely to exert a negative effect on the foreign exchange markets(appreciation).