Despite an overall short period of analysis, namely three days from Wednesday till Friday of the previous week, there are plenty of economic events that are worth mentioning and that were driving currency markets last week. The undisputed leader of the period was US Dollar, which surged by 1.72% on the back of ultra-positive US employment data. Country’s companies added 271,000 jobs in October, way above 181,000 expected by the markets. The Pound lost 1.85% versus the Greenback. Meanwhile, the Sterling managed to advance only against the Euro (+0.21%) and Australian Dollar (+0.09%) as they weakened amid stronger American currency.
Volatility of the Sterling exceeded average reading for the market, owing to surprising news from the Bank of England on Thursday and positive US labour market and wage numbers. Elevated volatility for the Sterling amounted to 23%, which was somewhat below the numbers we have seen several weeks before. GBP/JPY and GBP/SEK crosses helped to outpace the mean market elevated volatility of just 16%, being that they posted these indicators at 30%. We could expect all currency pairs of the Canadian Dollar to be turbulent as well. Indeed, the GBP/CAD pair registered the third-largest maximum volatility for the period at 4.68 points after GBP/USD’s 5.59 and GBP/JPY’s 5.23 points.
Significance of the Pound Sterling could be very low for the period ended November 10. However, this indicator was helped by the Bank of England’s data on Thursday, which pushed the composite significantly to the north and improved the mean correlation coefficient, which surged to 0.43 points. This reading was above 0.34-0.36 points posted for the past month, six months and last year. Traditionally low correlations were posted by first and second most traded GBP crosses, namely the Cable and EUR/GBP. As a result, this particular component had longer tails than others as it used to fall deeply into red on Friday and Monday.
The Euro index continued to strengthen the tendency of decline throughout the week, moving in the narrow band between 98.9 and 100.0. It reached its lowest point on Thursday morning, losing more than one per cent of the initial value. The index was highly affected by *European Central Bank President Mario Draghi comments who underpinned expectations for further stimulus, possibly as soon as next month. Nevertheless, later on, the index started its slow growth and climbed to 99.81 points mark by Friday. The EUR index managed to outperform other indices in terms of the Thursday’s development showing the biggest grow. With that the EUR index significantly outranged the JPY and the SEK indices, and took the lead over its AUD and NZD.
Elevated volatility of the European single currency was hovering around the median readings of several preceding weeks, as it stood at 20% versus 16% for the market during a five-working-day period from November 6 until November 12. These numbers were also reflected in the mean volatility index, which reached only 0.81 points. There were only two major spikes in turbulence registered throughout the week, and one of them has been created solely by the dollar, which posted considerable reaction after the surprisingly strong US monthly payrolls. Therefore, EUR/USD was turbulent in 30% of all time.
The Euro significance measure had a few ups-and-downs and ranged from 0.27 to 0.61 during the past week. The average values also remained almost unchanged from the previous period. Only three components lifted their mean levels. Thus, EUR/USD mean correlations with EUR/JPY, EUR/GBP and EUR/CAD gained 0.03-0.08 points. In terms of long-term values, current averages of almost all observed correlations shifted up, pulling the overall Euro significance with them.
The Greenback’s increase caused by the better-than-expected US labour data on November 6 was replaced by the downward trend, and the dollar spent the whole period in the negative area. The UK economic data report on Wednesday made the pound the best performer of the week. The Aussie nearly matched the Sterling’s strength. On Thursday, the encouraging Australian employment data pushed the AUD index to 101.23. However, afterward the Aussie has slightly declined and ended the period with 0.79% gain. Thursday also was marked by the several speeches of the ECB and Fed leaders. Thus the Euro index has lost 0.31 points after Mario Draghi said that the ECB is planning re-examine monetary easing at the December meeting. However, a few hours later the Euro started to grow and reached the 101.12 mark against the background of the Fed’s Yellen’s speech.
Despite all the shifts in the currency indexes, volatility on the market was borderline subdued, with most overturbulence portions below 20% and maximum index values around 1.5 points. The Aussie and the krona were the only exceptions. Volatility of the former skyrocketed on early Thursday just after the announcement of 0.3% decreasing unemployment. As a result, the AUD Volatility index reached the 4.36 mark, but the AUD /USD measure spiked to 4.59 level. In addition, the market’s index reached the week’s high at 1.54. The krona, in turn, was zigzagging throughout the week against the background of inflation and other less notable Swedish economic releases and, thus, having 27% elevated volatility portion became the most turbulent in terms of it.
Despite the fact that the dollar started the week with a sharp drop, the average values of the Greenback’s significance measure and most of the USD/EUR components have increased comparing with the both the short-term and long-term values. The most notable strengthening was observed in bond with Pacific currencies. Thus USD/EUR correlations with USD/AUD and USD/NZD exceeded the previous averages by 0.22 and 0.18 points respectively. The USD composite, in turn, added 0.06 points comparing with the previous period. However, the aggregate ended the week with the 0.39 points lost.
Australian Dollar and British Pound were two major competitors for leadership during the researched time period ended Tuesday of this week. Initially the UK currency was the best performing currency. At the same time, the Aussie’s spike on November 12 made it clear that South Pacific currency will become the week’s best performer. Overall, a weekly rise for AUD Index reached 1.4%, while GBP rallied by circa 1% over five trading days. Another commodity-linked currency, the Kiwi, was depressed by unchanged inflation expectations from the Reserve Bank of New Zealand, which tried to raise them by losing policy requirements. NZD Index was therefore down 1%.
Volatility Index for the Sterling was ironically quite turbulent itself, judging by the picture drawn in the main chart. Some local spikes in volatility were immediately changing by huge dips down to 0.4-0.5 points, and we observed no stability during the whole time period from Nov 11 until Nov 17. As the Pound volatility spent most of its time below the historical average, it forced the reading of elevated volatility to decline to just 17%. However, even in this situation the GBP surpassed market average of just 14%. The least turbulent cross was GBP/NZD (9%), being that the Kiwi was gradually losing ground, while Pound used to rise steadily. Top volatility was posted by GBP/SEK at 26% last week.
Significance of the Pound, measured as an average correlation between different pairs of this currency, has slightly exceeded the readings we observed earlier in our previous reports on the Sterling. Mean correlation coefficient reached 0.38 points and overshot 20, 130 (half-year) and 250-day (annual) averages of 0.36 points. Two least volatile and therefore well-correlated components were the ones of EUR/GBP with GBP/CHF (0.72 points) and GBP/SEK (0.79). At the same time, traditionally the least correlated component included the Cable as European and US session were pushing EUR/GBP and GBP/USD in different directions.
Continuing the negative trend the single currency and the Swiss franc again have become the worst performers of the week. Loosing against all other observed currencies except Swiss frank, the Euro has depreciated by 1.6%. The decrease of the franc was a little less — 0.68%. For the other closely observed currencies, CHF and SEK, as well as for the New Zealand dollar the past week also was failed. At the same time, the most notable growth was observed in the dollar currencies. During five trading days the Greenback and the Aussie have gained 0.19% and 1.1%, respectively.
The week was rather tranquil with only few events that notably influenced the market volatility. The most volatile in terms of the elevated volatility portion, was the Swedish krona. Its volatility measure has spent 24% of time above the 1.0 level, which indicates the average historical level. However, the biggest index’s values was obtained by EUR/JPY, namely 2.5 points mark, after the announcement of Japanese Gross Domestic Product. Japan’s economy shrank again in the third quarter, underscoring the challenges Prime MinisterShinzo Abefaces in trying to engineer a sustainable recovery.
The period was marked by the high values but a general downtrend in the average correlation between Euro crosses, which suggests great amount of economic announcement from other regions. In Tuesday’s morning, the Euro went down notably despite data showing that German investor confidence rebounded this month, as the diverging monetary policy outlook between the Federal Reserve and the European Central Bank weighed.
The period was fairly smooth for the observed indexes, as most of them did not sway farther than +/-0.5% from the baseline. A notable exception was the Aussie’s gauge that rallied throughout the second half of the week and posted a 2% growth over its Monday value. Another rally was coined by the Kiwi’s index, as both Pacific currencies seemed to have benefited from the Greenback’s post-FOMC feebleness. Meanwhile, the franc’s gauge posted the greatest loss after spending the whole week on a downtrend.
Even against the background of several tranquil weeks, volatility on the market remained extremely subdued, with both the Greenback’s and the aggregate measures holding below the two-week means for 90% of time. Moreover, elevated volatility portions of all observed currencies did not exceed the 15% level, and the spikes of the indexes did not reach even 2.0 points. The Aussie looked the most tranquil, put against the background of several relatively turbulent weeks, and reached only 6% of overturbulence.
After the previous week’s lowering, the Greenback’s significance measure showed an upward trend. The composite was fluctuating in a range between 0.21 and 0.65, but its average gained only 0.01 points over the previous period’s reading. Most of the USD/EUR components also showed a slight increase. The most notable rise was observed in the pair’s bonds with the USD/AUD and USD/NZD, which gained 0.12 and 0.07 points, respectively. The average value of the component with USD/GBP, in turn, has lost 0.07 and 0.04 points compared with the short-term and long-term values.
Last week was extremely busy, with different types of fundamental data releases. Apparently, almost all of them were published outside Australia, which is the main currency of discussion this time. Despite the mentioned fact on the lack of news, the Aussie used to be the most bullish currency of the period ended November 24. During the first part of the week it shared leadership with the New Zealand Dollar, which eventually gained 1.08% in five trading days, while AUD rallied by 1.84%. A clear loser was the British Pound, which was actively depreciating on Tuesday after comments from BOE Governor Carney who said that interest rates will rise very slowly.
The Aussie’s volatility was broadly following other countries’ events, which made it quite dependent on other regions to see somewhat more active trading throughout the weekly period ended on November 24. Considering lack of local statistics, the AUD elevated volatility of 15% can be logically justified. Moreover, it lingered behind the all-market uplifted volatility indicator of 19%. Only the AUD/USD cross was shaken up slightly more than other components, mainly due to large presence of US fundamentals last period, including second-revision GDP and FOMC meeting minutes. Here the elevated volatility reached 23%.
Significance of the Australian currency calculated as an average correlation between various pairs of this currency and measured by the composite indicator stood at largely high levels from last week’s Wednesday until Tuesday of this week. Initially correlations used to be subdued, partly due to behaviour of several separate components that turned red at some points of time. The vast majority of components, however, hovered firmly in green but failed to completely avoid situations with low or negative correlations. As a result of that, some components used to have their tails extending somewhat below zero last week.
The period, which put most of the observed indexes either on or above the baseline, resulted in a 0.8% loss for the EUR Index, making it the week’s second worst performer. The only peer to fall behind the Euro’s measure was the Pound gauge, which was weighted down by the decent data in the US and dovish sentiment coming from the Bank of England at Parliament’s Treasury Select Committee hearing set the dollar off on a tear on Tuesday. On the other side of the baseline, the Aussie remained the leader and posted a 0.84% weekly gain, greatly supported by the strong prices on the country’s export commodities while RBA Governor Stevens’ speech also weighed.
In a terms of the elevated volatility, the market and the Euro continued the previous week tendency. Thus the portions of elevated volatility of the aggregate and EUR were 24% and 22%, respectively. For the most of the components the past week quite turbulent. The major gainers were EUR/CHF, EUR/CAD and EUR/SEK, the components showed relatively high results, having held above the 1-point level 28% and 31% of the observed week. The highest peaks of the market and EUR volatility indexes even manage to reach 2 points. Among the components, EUR/CHF, EUR/AUD and EUR/CAD managed to overcome the 2-point level.
For the second week in a row the single currency significance measure managed to rebound. Thus in a three trading days the composite has strengthened by 0.35 points. However, the distributions of the EUR/USD components shifted down slightly, though most of their average decreased compared to the previous readings. The most notable loss was observed in the component containing EUR/CHF, which showed the downward trend throughout the period and lost 0.11 points to its average.
The range containing the indexes narrowed again, keeping most of the gauges only 0.5% away from the base value. The period’s greatest tumble, suffered by the pound’s index after dovish comments of the BoE officials voiced on Tuesday, barely took the measure below the 99.0 points line. The week’s high was even more moderate, the NZD Index’s Mon-Thu rally coming to a peak just 0.9 points above the baseline. The rally was interrupted on Tuesday, when the investors abruptly turned to the safe haven currencies, but returned with greater strength later in the day.
Volatility on the market picked up compared to the previous tranquil period, with the splashes of activity mostly covered by the European sessions and amounting to 24% of overturbulence, with the peaks resulting largely from a single currency’s movements. On Monday such defining currency was the Canadian dollar, whose volatility index reached its high of 2.3 points as the Loonie zigzagged with the oil prices. Tuesday’s uptick was fueled by the Aussie’s dip, while Friday’s spike came from the franc’s measure surging to the week’s absolute high of 3.4 on the back of the currency’s tumble that might be attributed to the SNB. Wednesday’s splash of turbulence was the only one supported by several currencies at once, as the krona’s, the Euro’s, and the franc’s falls pushed their volatility indexes to the 1.5 points mark.
The past week was marked by a few ups-and-downs of the Greenback’s significance measure. The composite was fluctuating in a range of 0.15-0.58. The most notable changes occurred in bonds between the USD/EUR and its Asia-Pacific peers. The average of the component with USD/JPY gained 0.15 points, but correlations between USD/EUR and USD/AUD and USD/NZD lost 0.28 and 0.13 points, respectively. Moreover, the Pacific currencies turned out to be the major market drivers in the past week, as their composites spent the period above their counterparts. Compared with the long-term values, all observed averages, save that of the USD/AUD component, were in line with the monthly values.
Australian Dollar spent most of the time below the base line during the last four days of November. However, positive but expected impetus provided by the RBA decision to keep interest rates unchanged helped the currency to escape the red territory. As a result of that, the AUD Index was the second-best performing component this time, which rose by 90 basis points in five days. Weekly leader was the Kiwi, which added 1.72%, even though this currency also had lagged behind the majority of it peers, especially in the middle of the period. Meantime, the Swiss Franc tumbled by 1.16%, on the back of expectations that SNB will be forced to cut interest rates further into negative zone, in case the European Central Bank decides to expand/extend stimulus measures at its meeting on December 4.
Even though the overall volatility of the Australian currency was light during the observed period, at some points of time the Volatility Index registered a number of very important spikes which reflected incoming fundamentals from both Australia and other countries. Elevated volatility stayed at 22% last week, missing the average market reading by one full percentage point. EUR/AUD and AUD/CHF were among the most volatile crosses. The Euro has become increasingly turbulent, as the ECB meeting is looming, while the Franc is largely dependent on the single currency due to monetary policy interconnection between the Euro zone and Switzerland.
Significance of the Australian Dollar held at more or less uplifted levels during the period from November 25 until the first day of winter. As a result of that, the mean correlation coefficient hovered at 0.59 points. The reading surpassed all monthly, 6-month and yearly averages of 0.54-0.56 points. Only on Wednesday and Monday the composite coefficient indicator has been located below the weekly average, but in all times it managed to commence a quick recovery. The only correlations, namely those with the Kiwi, used to spend short periods of time in red, and it was reflected in longer tails for these components.
[ul]
[li]While all eyes now turn to the US as investors, economists and ordinary people with great anticipation are waiting for the Fed’s decision in December in regard to the borrowing costs, the rest of the world remains in a somewhat shaky condition.
[/li][li]The European economy continues to struggle to recover solidly, weighed down by ongoing geopolitical turbulence, refugee crisis and stubbornly weak inflation. While ECB President Mario Draghi has refrained from ramping up stimulus measures so far, he provided investors with the strongest hint yet that the central bank will initiate a new round of fresh stimulus measures at its December meeting. The decision is likely to impact sentiment among investors and economists.
[/li][li]In the North American region everyone is watching closely the economic developments in the US, as the Fed’s decision in December will definitely influence markets and economies worldwide, as well as further actions of major central banks.
[/li][li]Emerging economies in Asia-Pacific continues to falter due to a slowdown of the Chinese economy, the region’s economic powerhouse. In the South Pacific area, policy makers monitor closely how their monetary policies impact the pace of economic growth. Meanwhile, Japan, the world’s third biggest economy, continues to recover moderately.
[/li][/ul]
The Euro index, few weeks being in the opposite end, was surprisingly one of the best performers last week. It was followed by the Swiss franc index which experienced the same development over the period. Monday was rather calm day, all of the indices, spent the day +/- 0.1% around the base (opening) value. Tuesday’s data releases/events pretty much shaped the most of the period for the NZD, AUD and some of the other currencies. The New Zealand dollar gained 1% during the day and closed 1.2% above the base value. The currency hit the highest level since November 3 and was boosted by bullish sentiment on*Asian equity markets,*despite factory activity in China remaining in contraction.
The volatility was rather calm during the observed period, except Wednesday. The fourth day of the week was special not just with many events, but also with the ECB President Mario Draghi decision. The single European currency jumped to a one-month high, as traders digested the ECB decision that extended the length of QE. Meanwhile, the macro calendar shifted into a faster gear, unveiling a set of manufacturing data, starting with a sluggishChinese manufacturing PMI, as the gauge dropped to a three-year low at 49.6 points in November. A similar downbeat picture was also seen in the US, as theInstitute for Supply Management (ISM)posted its manufacturing index at48.6 points in November.
During the first four days of the observed period the significance measure of the Euro followed a descending pattern, as there were no economic releases from the Euro zone that could notably influence the bonds between the single currency’s pairs and the market was preparing to Thursday’s ECB meeting. Thus, the distributions of the correlations between the most traded pair and its EUR counterparts were significantly skewed towards the zero level. However, the period was associated with several notable spikes of other currencies’ significance, which followed the news from the European side.
The week was associated with strong Pacific currencies and the ECB monetary policy statement, which turned out to be the most resonant event of the period. As a result, by Friday the observed currencies formed two well-separated groups, with the members of one gaining 0.6-1.9%, and members of the other loosing 1.2-2.1% of their base values. ECB changed the situation notably, and all the European currencies excepting the pound took the leading positions from their Pacific counterparts, which were rallying against the background of economic releases such as improving manufacturing sector performance and growing GDP.
After a long period of tranquility, the past week was quite turbulent for the Greenback, and the USD Volatility Index spent 44% of the period above the historical level. Elevated volatility portions of most of the observed currencies were even higher, with the franc’s reading at 56%, and the market’s and the pound’s at 48%. Meanwhile, the Euro suffered the highest spike of volatility – on Thursday, right after the ECB monetary policy statement release, its index jumped to the 8.9 level. The EUR/USD component reached the high of 10.5 points.
In the past week the dollar’s correlation composite showed a pattern of stepwise strengthening, with only a few dips between the jumps. The measure’s average remained on the long-term level, even as some of its USD/EUR components experienced sight weakening. Thus, the pair’s bonds with USD/CHF and USD/SEK produced unusually many weak values, while correlations with USD/AUD, USD/CAD, and USD/NZD were generally downward-biased. Nevertheless, the dollar’s composite showed average strength compared to its peers, outpaced in its mean value only by NZD (0.61), CHF (0.52), and CAD (0.51).
Following the long-awaited, but disappointing ECB decision to expand the monetary policy less than it was initially estimated, the foreign exchange market divided itself into two camps. In the first group, which included the Swiss Franc, Euro and Swedish Krona, we observed a strong rally starting from Thursday of the previous week. The 19-nation currency appreciated by more than 2%, but the Franc had an even sharper gain of 3.21% on a five-day basis. Alongside, the Canadian Dollar and other currencies found themselves below the base line, and the Loonie plunged the most by 2.29% during the period. Meantime, the Kiwi made an attempt to recover on Friday, but bounced back amid a deepening decline in oil prices, which put extra pressure on commodity-linked currencies.
Elevated volatility of the Canadian Dollar held at a healthy 50% level during the period ended Tuesday, December 8, even despite falling short of the pan-market’s 56% reading. The most turbulent currency pairs were EUR/CAD (54%), CAD/CHF and CAD/SEK. The Euro, Franc and Krona were three components, against which the Canadian Dollar tumbled the most last week. In the meantime, USD/CAD was increasingly volatile in just 41% of all time, in spite of important US fundamentals including the payrolls report on Friday and ISM non-production PMI on Thursday.
Significance of the fifth most held reserve currency in the world is considered to have been high in course of the first week of December. Canadian Dollar was helped by the busy fundamental calendar, which included a number of important domestic events. Moreover, oil price developments had a major impact on the Loonie, which is one of the main commodity-driven currencies. Overall, the mean correlation coefficient was 0.53 points last week, up from 0.43-0.46 points on the monthly, 6-month and annual time frames. This fact is only affirming the importance of CAD, while long tails for the majority of the components shows that the CAD crosses were not fully unanimous during all time of the period.
The releases of significant economic news, which notably influenced the currencies, were concentrated in the first and the last days of the observed period. Only a few releases took place on Monday-Tuesday, which, in fact, significantly affected the market. However, the EUR index was quite changeable during these days. For example, on Tuesday it started to increase, continuing to retrace its ECB-surge and extending the previous gains, while German trade figures had a minor effect on the currency. Germany’s trade surplus shrank in October, but was still higher than expected. Both exports and imports declined more than expected.
Market volatility was evolving on an ordinary pattern during the week, showing moderate turbulence during the US and Asian trading session. The most changeable and thus the most volatile was the Swedish Krona, whose index spent 57% of time above the 1.0 point level. The Yen, in turn, was the most tranquil in terms of elevated volatility portion, as the world’s third-largest economy avoided technical recession and added to speculation that the BoJ will refrain from more stimulus in January. The most conspicuous surge of the market volatility was observed on Friday, when the market was awaiting Canadian employment reports, and early on Thursday morning, after the publication of extremely strong Australian employment data that wiped out the New Zealand dollar’s post-RBNZ meeting gains.
The Euro’s correlation levels picked up from the previous period’s readings, with the composite’s values shifting away from the lower part of the monthly distribution. Among the EUR/USD components, the most notable overall strengthening occurred in the pair’s bonds with EUR/GBP, EUR/CHF, and EUR/CAD. EUR/CAD and EUR/GBP, along with EUR/JPY, posted the greatest average correlations with EUR/USD, with all values at or above the 0.70 points level. Moreover, EUR/USD-EUR/CAD and EUR/USD-EUR/AUD components lifted their averages notably higher than the long-term values, posting 0.10 points over the annual means.
The past week was slow for the dollar’s index, but some of its peers managed to move relatively far from the baseline. The biggest weekly changes were posted by the Loonie’s and the Aussie’s gauges, which were pressured by the post-OPEK downslide in commodities and spent the period on a downtrend, finishing it below the 2.5% loss line. Notably, the AUD Index had a chance at recovery on Thursday, when strong employment data pushed it to cover most of its Tuesday and Wednesday losses. However, the currency failed to catch momentum and tumbled throughout Friday. Meanwhile, its New Zealand peer, which was following its downslide in the beginning of the week, made good use of the RBZN’s rate cut and erased it losses to post a near-zero weekly change. The winners of the period were the yen’s, the franc’s, the Euro’s, and the pound’s measure, all moving on similar patterns in the second half of the week.
The dollar was notably “underturbulent” compared to the market, holding its volatility measure below the composite index for the whole past trading week. Its elevated volatility portion and average turbulence also lacked behind those of its peers, and the Euro’s readings were the only ones to signal calmer behavior. The least stable, in turn, were the Pacific currencies. The Aussie and the Kiwi kept their volatility indexes above the historical average for more than 50% of time and reached the week’s highs of 6.66 and 4.88, respectively. Such activity reflected the uneven surge of the currencies after the RBNZ’s rate cut and the release of strong Australian employment data.
The Greenback’s significance measure started the period well above its average level. However, from there the composite showed a downward trend, losing more than 0.35 points by the end of the week. The sharp decline was caused by the weakening of the components with USD/AUD, USD/CAD, and USD/NZD. The lowering of the commodities prices on Tuesday and Friday led to the fall of the components, putting them in the negative area. Their averages, in turn, lost more than 0.25 points. This resulted in a reduction in the average of the dollar’s aggregate, and it declined by 0.12 points.
The Pound traded generally above the main baseline for the most of the period ended December 15. At the same time, some weakness provided by bearish market participants at the end of the five-day period resulted in a decline of the GBP Index. Thus, it used to finish the week with literally no change in value. Similar to the UK currency, the Swiss Franc finished the week with a loss of only one basis point. The biggest losers were CAD and AUD, as they failed to cope with declining oil prices. Another commodity currency, the Kiwi, was surprisingly the best weekly performer, which rallied by 1.74% in five days. Despite the Reserve Bank of New Zealand delivering a so-called “hawkish cut” to the key interest rate, economists see an improvement in terms of NZ fundamentals, which should further underpin the local currency in the nearest future.
During all days of the researched period except Monday (December 14) we have got a number of important fundamentals from different countries. In particular, the week was busy for central bank events, with the Bank of England, RBNZ and the Swiss National Bank all releasing their monetary policy decisions. Joined by other statistics across the board, the Pound became highly volatile in course of the period. Elevated volatility reading reached 58% and matched the market average. The most volatile cross was GBP/JPY, which was turbulent in 77% of all time. The Yen was the second-best performing currency last week, as investors attempted to keep their funds in safe assets in the run up to the Fed rate decision.
Correlations among different currency pairs of the Sterling were generally trending higher during the observed period ended December 15. While last week was full of important events, it used to drive different GBP crosses in various directions. At the same time, silent Monday and pre-Fed Tuesday provided the UK currency with higher significance when the composite reached weekly highs. Some interesting components to mention included all commodity-linked currencies. The oil price rout, which was taking place throughout the whole period, was in parallel pushing NZD, CAD and AUD down. These components registered extended tails and mean correlation coefficients of only 0.12-0.18.
The Euro index was rather stable past week, and even spent the most of the time above the baseline. However on Wednesday, the single European currency was induced by the Federal Reserve’s rate hike, as investors digested details of the subsequent press conference, pushing the euro closer to the $1.10 level. The dollar, which showed the downward trend, on the contrary, began to grow stronger and became the leader of the period (+1.02%). The much less fortunate were the pound, the Aussie, and the Canadian Dollar, whose indexes formed the top 3 losers and dropped by 0.63, 1.03 and 1.27 points, respectively.
The past trading days injected the market with a solid amount of volatility, raising most of the currencies’ overturbulence portion above 40%. The Euro was the most tranquil currency with the reading of 31%, while the absolute leader was the yen, which held its index above the historical average for more than 55% of time. The highest peak, in turn, was reached by the Greenback’s gauge, as it spiked to 3.6 points on Wednesday, amid the Federal Reserve meeting. Meanwhile, the next day the dollar was trading close to two-week highs after the Federal Reserve raised US interest rates for the first time in a almost a decade.
The Euro’s significance measure posted stabile negative trend, with the lower readings at the end of the observed period which were affected greatly by the Fed monetary policy decision. The reaction was well seen in the EUR/USD-EUR/AUD correlation distribution, which slid down to its lowest long-term values. Among other EUR/USD components, there was virtually no shifts neither from the previous readings nor from the long-term records. During the past period, the Euro’s correlation composite was mostly governed by the single currency’s morning movements, pushing the measure up on Friday and Wednesday.
The past week was one of the most anticipated week’s of the year, as the Fed finally delivered its first rate hike since 2006. However, the US policymaker was not the only one to make announcements, and the long-awaited Wednesday did not hold the sharpest moves. Instead, the greatest surges were shown by the krona’s and the yen’s gauges, both in response to their national banks’ releases. The SEK Index jumped 0.8 points as the Riksbank decided against additional stimulus on Tuesday, while the yen’s measure went into a half-day-long rally after the BoJ set on supplementary measures instead of a major policy move on Friday.
For the third week in a row the Volatility Indexes of the market and the Greenback were quite turbulent and spent about 40% of the period above the historical level. For the dollar the week was also marked by the highest volatility spike compared with its peers. However, in terms of elevated volatility, the undisputed leaders were the yen and the British pound, which spent a half of the past week above the 1-point line. The Euro, in turn, was the most tranquil currency of the period and the portion of elevated volatility of the index was even less than 30%.
The dollar’s correlation composite retained its weak position till Wednesday, when the boost from the Greenback’s reaction to the Fed’s rate decision pushed the measure towards the high 0.70 level. The post-Fed strength also shifted up the USD/EUR components’ distributions, however, the weekly average correlation levels did not grow significantly because the start of the week was associated with low and even negative values for the Pacific components, while the currencies themselves kept on being the major market drivers.
The Sterling was a clear under-performer during the previous trading period ended Tuesday, December 22. This currency was pressured by the bears, even though the fundamental front was much more optimistic than pessimistic. The GBP Index spent all of the period’s time below the major base line, meaning this component was losing value every single day. At the same time, until Tuesday the worst weekly performer was the Canadian Dollar; however, disappointing UK fundamentals on Tuesday pushed the Pound Index below the CAD Index. Therefore, the aggregate 5-day spread between two currencies reached 11 basis points by Tuesday evening.
Given that the beginning of this Christmas week was very poor on any fundamentals, especially on Monday, the vast part of volatility was observed during three days from Wednesday to Friday. Without any doubt, the highest spike was seen on Wednesday when the Federal Reserve made a historical interest rate decision. It hiked the target range for the Federal funds rate by 25 basis points to 0.25-0.5%. The decision was, however, largely expected and partly priced into markets. However, Janet Yellen’s press conference revealed that the Fed is on course to raise interest rates four times in 2016. While the market assumes only two hikes next year, this divergence caused most of the last week’s turbulence.
Significance of the UK currency was relatively high last week, and it was reflected in the readings for the mean correlations coefficient. On average, the correlation amounted to 0.43 points during the researched period. On the basis of the last 20 days, the mean correlation was 0.41 points, while falling to just 0.37 and 0.36 points on six-month and yearly time frames, respectively. The best-correlated component included the Swiss Franc, while those with commodity-linked currencies were sometimes posting correlations strongly below zero. The longest tail, however, was showed by the GBP/EUR & GBP/USD component amid the Fed’s event, which caused large volatility on Wednesday.
