| Summary: | This thesis is presented as a collection of papers. It contributes to three strands of literature concerning the foreign exchange (FX) market economics. Firstly, the literature on the exchange rate determination puzzle; secondly, the literature on the forward premium bias (FPB) puzzle and currency carry trade return; thirdly, the literature on currency trading strategies. In light of the scapegoat theory to exchange rates, we show that macro fundamentals have important role in the determination of exchange rates, contrary to the fundamentals-exchange rates disconnect literature, and we also show how macro implications are transmitted into exchange rates via the channel of order flow. Next, we show the importance of volatility and liquidity risk factors for understanding and explaining the performance of the currency carry trade return, implying that these risk factors are relevant in driving FX risk premium and in determining exchange rates. Then, by analysing actual US dollar (USD) forward positions against a number of emerging and advanced currencies, we provide direct evidence on the FX traders' behaviour with respect to the USD carry trading over the recent period of near-zero US interest rates. We find a pattern of USD carry trading against the emerging currencies, but a pattern completely opposite to carry trading -i.e. "fundamental-based" trading- against the advanced currencies.
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