2018-04-05 - We provide novel evidence on exchange rate predictability by using the term premia of the sovereign credit default swap (CDS). Using a sample of 29 countries, we find that the sovereign CDS term premia significantly predict the exchange rate out-of-sample. On average, a steeper CDS spread curve for a country predicts its currency appreciation against the US dollar (USD). Empirically, while the sovereign CDS level mainly reflects global risk, the information in the term structure of the sovereign CDS spreads reveals country-specific risk. Notably, the predictive power of the term premia is robust after controlling for the sovereign CDS level and other conventional macroeconomic factors. Further analysis shows that the information in the sovereign CDS term structure is also helpful for forecasting other important financial markets such as the stock markets in different countries.