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3 shows the insights that can be gained from this breakdown. here i focus on the period 2012 to 2014. during this period, short - term rates barely moved, as you saw on the previous slide, while the long - term interest rate differential was by and large disconnected from exchange rate movements – you can see this clearly again on the left - hand side. but now consider the right - hand chart. here i plot the exchange rate against the differential of the expectations component of ten - year interest rates as extracted from dynamic term structure models. 7 put simply, it is the same ten - year rate differential as on the left - hand chart, only corrected for the term premium estimate. the correlation during 2012 and 2013 is compelling, at around 0. 75. shortly before the crisis, in 2005 and 2006, the correlation was less than 0. 4. incidentally, the close relationship coincides with a considerable strengthening of central banks ’ forward guidance on interest rates. the federal reserve, for example, introduced date - based forward guidance in mid - 2011 and adopted state - contingent guidance in late 2012. the ecb, for its part, introduced rate forward guidance for the first time in july 2013, one year before it announced its credit easing programme. so, what could have happened is that market participants, trusting central banks ’ forward guidance that policy rates would stay at very low levels for an extended period, were increasingly pricing exchange rates on the basis of information about how policy would evolve in the more distant future. that is, with short - term rates broadly stable, the weight investors attached to the 4 / 11 bis central bankers'speeches expected future path mechanically increased – just as theory would predict. 8 term structure models can therefore provide compelling evidence that exchange rates remain deeply connected to monetary policy also when interest rates are at, or close to, the effective lower bound, even if interest rate differentials per se suggest a structural break in the relationship. asset purchases and exchange rates but the right - hand chart also suggests that this is not the full story. a clear break emerged in late 2013. and that break is likely related to the second policy instrument i mentioned before, namely asset purchases. although asset purchases, by removing duration risk from the market, act primarily on the term premium, they also entail a strong signalling channel, in particular at, or close to, turning points. for example, the federal reserve ’ s decision to start tapering in december 2013 triggered an appreciable increase in