Can the Intermediary Capital Risk Predict Foreign Exchange Rates?

The intermediary capital risk (ICR) is recently perceived as an important indicator of economic activities and risk premiums. In this paper, we provide individual time-series predictability of ICR for exchange rates of twelve major currencies against US dollar, in both in-sample and out-of-sample settings. This predictive pattern is robust when controlling for macroeconomic variables. Further analysis shows that a simple linear regression is sufficient to capture the predictive performance. Our results imply that the ICR factor is a useful predictor for exchange rates.