Forecasting, even with all its ambiguity and uncertainty, always remains one of the most alluring questions in financial modeling. And while spot prices themselves are commonly considered unpredictable, there are many theories that explore deterministic trails in other asset parameters. In this research we take a closer look at the idea of forecasting high and low prices through their linear combination – or, in other words, by using the notion of cointegration.
Results 1. Cointegration is not equally pronounced in all currency pairs.
4. ECM gives an apt, but not supreme forecast of the high and low prices.
Conclusion
In this research we have studied a method for forecasting time series that evolve in equilibrium relative to each other. We have confined the study to high and low prices, as they offer a channel forecast for future movements, but the same analysis can be carried out for ask and bid, or spot and futures prices.
It appeared that some currency pairs do indeed possess the property of keeping a stable range between highs and lows, but a great number of tests is required to find out if the results are reliable. We have also seen that asset volatility might have some influence on the intensity of the trait, so that the pairs with higher and less stable volatility are less likely to give positive results.
Apart from the purely theoretical characteristics, this type of analysis gives us an opportunity to build a special kind of forecasting model, ECM. The results of our study showed that ECM offers adequate forecasts, and in some cases performs better than the other tested method. Moreover, it is known to be possible to improve the forecast by employing an augmented, more complicated model - FVECM. This method was not covered in our research, but other econometric studies report various promising results. With that it can be said that this time consuming and laborious analysis is, after all, noteworthy and useful.
Euro index was one of the best performing currency indices last week and was surpassed only by the JPY and CHF indices. The latter one is most likely due to the 1.2 cap with the Euro. Monday was really calm due to the Bank Holiday in the US. NZD reacted on the New Zealand’s CPI data in the end of the day. Tuesday didn’t bring much changes either dues to the fact that most of the data releases or events were “soft”, unquantifiable. Wednesday had quite a few important data releases connected to the Euro and the EUR/USD, but it seems that only GBP and CAD indices were effected by them. Euro index started showing bullish bias on Thursday.
Better than expected Eurozone Current Account, Flash Manufacturing PMI and Flash Services PMI numbers caused Euro index to gain 0.4% (0.6% of gains in total). Another boost for the Euro came later in the day when Eurozone Consumer Confidence numbers came out better than expected. It added additional 0.2% to the index value. Friday’s events, despite having ECB President speaking, had seemingly no effect on the Euro index value which ended the week 0.86% above the base value.
Euro outperformed most of it’s major counterparts. Loss against CHF was expected, due to the 1.2 cap between the two, but 0.76% was a bit to the higher side. Loss against Yen, however, was a bit unexpected. Gains ranged from 0.46% against Swedish kroona till 2.25% against loonie.
Euro index was one of the worst performers last week as it managed to outperform only NZD and SEK indices. Monday did not bring any major changes as German Ifo came out mostly as expected and US data failed to move markets. Tuesday had no data releases directly linked to the Euro, but UK data seemingly directed some cash flows from UK to the Eurozone. Wednesday did not bring any major changes either. Euro was dragged down during the German 10-y Bond Auction, but soon returned back to the base value. Thursday was the decisive point in the Euro index development. Worse than expected German Preliminary CPI data sent it trailing down.
Index ended the day 0.55% below the base value. We saw a slight recovery on Friday when an Eurozone unemployment data showed 0.1% better than expected result. However, the overall trend remained bearish as CPI data was worse than expected and US data later in the day seemingly boosted the demand for the USD.
Euro posted gains only against few other major currencies—0.02% against NZD and 0.42% against SEK. As it rather usual (due to the 1.2 cap), minor loss (0.05%) is seen against CHF. In other cases however, the loses were substantial—from 0.91% against CAD, 1.05% against GBP till 2.16% against AUD.
USD index improved its performance and ended the week above the base (opening) value, but was a mediocre performer surpassed by JPY, AUD and CAD indices. Wednesday started calmly for the US dollar which gained 0.2% after the FOMC Statement and Federal Funds Rate announcement. This gave an overall tone for the dollar for the rest of the week. US Advance GDP and Unemployment Claims came out worse than expected on Thursday, but it did not manage to disturb the bullish bias of the index which ended the day 0.51 above the base value. It climbed additional 0.5 above the base value on Friday, but lost some appeal when Revised Consumer sentiment came out.
It’s results were as expected, but it seems that market participants were hoping for something more. European data coming out from Monday’s morning redirected some cash flows from the US. Worse than expected US Manufacturing PMI data did not do any good for the USD either. Australian Cash Rate announcement early Tuesday morning clearly attracted substantial capital flows to the Australia and New Zealand. It gave tone for the rest of the day and mixed US data later on the day did not change anything.
USD itself was a mediocre performer. It surpassed all of the European currencies, but lagged behind AUD, JPY and CAD. However, taking in to the account recent performance by the NZD we expect it to outperform not only USD, but most of other currencies as well.
These are the highlights of the recent report. VIDEO version of the report.
Prospects of the global economy as seen by the participants of the Dukascopy Bank SA January poll became less attractive compared to the December poll’s results as the six-month sentiment index decreased 0.02 to 0.64, while the three-year outlook stood unchanged at 0.73.
European economic sentiment index was slightly down compared to the last month’s reading. The January forecasts within the region showed 0.53 for the six-month time span and 0.64 for the three-year time span.
The only region where poll participants expect an acceleration of the economic development in both the short and long terms is North-America, as the forecasts six months from now advanced 0.02 to 0.73 and experts’ projections three years from now gained 0.03 to 0.80.
The Asia-Pacific is expected to experience a slowdown as the six-month expectations retreated 0.07 to 0.65, while the three-year predictions fell 0.04 to 0.74.
Figure 3 presents the term structure of the Dukascopy Bank Sentiment Index (Y-axis) mapped against GDP growth forecasts made by poll respondents (X-axis). Overall, DBSI values and GDP growth forecasts match directionally, suggesting the global economy will perform better three years from now.
Expected growth of the European region six months from now dropped to 0.62% in January from 0.80% prior month, while the economic expansion three years from now decreased by 0.7% to 1.17% during the month.
The six-month growth in the North-America decreased slightly to 2.00%, while the three-year forecast improved a little to the level of 2.53%.
The expectations regarding the Asia-Pacific economic development remained the strongest among the three regions despite the decrease of the indicators’ values. Experts expect the region’s economy to expand at 3.76% rate six months from now and 4.00% by the early 2017.
January poll results reveal that respondents from North-America are consistently more optimistic about the local economic outlook compared to their foreign colleagues. Europe: Local experts have equal expectations of the region’s six-month and three-year development, yet foreign poll respondents are less optimistic regarding the economy six months from now. The discrepancy in the opinions between the groups reaches negative 0.10 for the three-year economic
outlook. North America: Respondents from the North American region are more confident in the region’s both six–month and three year economic development than the foreign poll participants (0.80 vs. 0.70 and 0.83 vs. 0.79, respectively). Asia-Pacific: Local respondents’ projections about the Asia-Pacific economic outlook by the middle of 2014 meet the foreign experts’ anticipations, while the discrepancy in views reaches the value of 0.09 for the three-year economic sentiment index.
USD index was one of the worst performers in the period of analysis. It managed to outperform only JPY index which was hit heavily by the ECB rate decision after the Japanese 30-y Bond Auction that took place earlier. We saw quite a few data releases from the US on Wednesday, but USD index felt none of it and was +/- 0.07% around the base (opening) value. However, it lost 0.2% on the ECB Bid Rate decision on Thursday. Index started recovering afterwards, but was hit by the Non-Farm Employment Change data on Friday. It dragged the index 0.3% lower and caused it to close 0.45% below the base value. That was a defining moment in the period for the USD index.
There was very few events on Monday and they had no impact on any of the major currencies. USD index continued to trail lower on Tuesday as testimony by the new Fed Chairman, speech by the FOMC Member Plosser and the US Job Openings failed to boost the market’s confidence in the USD.
USD posted gains only against JPY which, as mentioned before, was surprisingly heavily hit by the ECB Rate Decision. Losses against other currencies were substantial—from 0.58% to 0.67% against CAD, CHF, GBP and EUR till at least 1.2% against SEK, NZD and AUD.
Euro index once again was one of the worst performers last week. It managed to surpass only USD index which showed a 0.98% loss in the period, and CAD index, 0.47% loss, as opposed to 0.3% loss by the EUR index itself. Most of the other indices showed results varying from 0.06% loss till 0.19% gains. GBP index, however, ended the period 1.3% above the base (opening) value. EUR index did not show clear bias on Monday and Tuesday as we saw very few data released on Monday and Tuesday had no events directly linked to the Euro at all. Index was +/- 0.2% around the base value at that time. It could be said that highlight of the period for the Euro was Wednesday.
BOE Governor’s speech and Inflation Report shook the markets. ECB President’s speech slightly later in the day fuelled the markets as well. However, Euro did not benefit from it. EUR index lost 0.45% on Wednesday when GBP index gained 1.05%. Australian Job Markets data coming out half an hour after the midnight, surprisingly, shook the whole market on Thursday. Euro index started showing clear bullish bias after that whereas greenback started trailing lower. Worse than expected US retail sales and unemployment data later in the day boosted the Euro further which gained 0.31% during the day. Friday saw quite a few Eurozone data releases and although all of them came out better than expected this had virtually no effect on the Euro index.
USD index was one of the worst performers last week. It managed to outperform only 3 out of 8 other currency indices; also it closed (0.39%) and spent all of the period of the analysis below the base (opening) value. Wednesday had very few US data releases scheduled therefore no major changes were expected. However, BOE Governor’s speech and Inflation Report boosted the value of the GBP and dragged USD, and most of the other indices, down. Although USD index recovered from it rather fast, clear bearish bias was felt on Thursday as well. US data gave worse than, or as expected, results which dragged the USD index lower to end the day 0.32% below the base value.
Worse than expected US data releases on Friday did not give any basis for the recovery either. USD index ended the week 0.73% below the base value. Monday did not bring much change for most of the currencies due to the bank holidays in the US. Worse than expected data releases from other regions helped USD index to advance yesterday. It gained 0.2% during the day and ended period of analysis 0.39% below the vase value.
USD posted gains only against aussie, kiwi and Swedish Krona. The latter one, seemingly, was hit hard by the ECB Monthly Bulletin on Thursday and ECOFIN Meetings yesterday. The aussie and the kiwi lost fair share of value after Japans Monetary Policy Statement and BOJ Press Conference. It seems that Australian Monetary Policy Meeting Minutes did no favour either.
Highlight of the period, in terms of trading activity was seen on Wednesday. BOE Inflation Report and following BOE Governor’s speech caused EUR/USD volatility to peak till 3.2 times the usual (long term) level. Market volatility at the same time reached the highest level in the period of analysis as well—1.7 times the usual level. Thursday was similar in terms of volatility in the market—it peaked till 1.6 times the usual level. EUR/USD reaction to the ECB’s Monthly Bulleting was much stronger. The pairs volatility was 2.5 times higher than usual. Range of data releases on Friday fuelled trading activities, but market and EUR/USD volatilities were just slightly above their usual levels.
Euro index, few weeks being in the opposite end, was one of the best performers last week. It was surpassed only by the Swiss franc index (mainly due to 1.2 cap). Monday was rather calm day, all of the indices, with the exception of JPY, spent the day +/- 0.4% around the base (opening ) value. Tuesday’s data releases/events pretty much shaped the most of the period for the Euro, Swiss franc and some of the other currencies. Euro index gained 0.65% during the day and closed 0.71% above the base value. US data releases on Wednesday did not bring much changes for the Euro index. It ended the day 0.78% above the base value; that’s a 0.07% gain during the day.
Euro and Swiss franc lost 0.25% on Thursday as Eurozone Flash Manufacturing PMI and most of the German and French PMI’s earlier in the day came out worse than expected. However, ongoing Spanish 10-y Bond Auction managed to maintain the interest of traders in the Euro which started to slowly climb higher afterwards. Clear bullish bias of the Euro was felt on Friday as well as worse than expected US and UK data redirected some of the capital flows towards the European currencies.
Euro posted gains against most of it’s counterparts. The only, 0.24%, loss is seen against the Swiss franc which occurred due to the 1.2 cap maintained by the Swiss national bank.
We are seeing slight increase in volatility in the markets as elevated volatility in the market was observed in 19% of the time, in comparison to 15% last week. This gauge increased by 5-10% in quite a few currency pairs as well. In addition, average volatilities in the period started to increase and approach usual, long term, values.
Monday showed very subdued volatility levels. The peaks that took place could be attributed to the lagged reaction to data releases in other regions than Europe or the US or to public statements by the Eurogroup. On Tuesday we can observe one of those very rare cases when market reacted to some news/data release, but EUR/USD showed no reaction.
USD index, as most of the other currency indices, was a mediocre performer in the period of analysis. Only CAD and NZD indices managed to standout from the crowd. SEK demonstrated clear bearishness earlier in the period, but ended up with the rest of the indices on Monday. USD index started demonstrating clear bullish bias from mid day on Wednesday when it hit the period low (0.15% below the base value) at 10 GMT. Despite the worse than expected numbers earlier in the day, FOMC Meeting Minutes helped USD index to end the day 0.29% above the base value. Thursday did no bring much change as most of the US data came out better than expected.
Index continued to climb higher on Friday as all of the UK’s and some key Canadian numbers came out worse than expected and directed some flows in to the USD helping it to gain additional 0.1%. Substantially worse than expected Flash Services PMI numbers dragged the index closer to the base value. It ended Monday 0.3% lower than started. No major surprises were seen in numbers on Tuesday which allowed USD index to hold the status quo.
Gains and losses against other counterparts were rather marginal, most were in +/-0.2% range. Only noticeable results were seen against CAD, 1.23% gains, and NZD, 0.48% loss.
We saw a few rare cases when market (Dukascopy Bank Volatility Index) and EUR/USD showed substantially different reactions to the same events. First case took place on Thursday, when Chinese Flash Manufacturing PMI numbers shook the market (volatility 1.3 times higher than usual), but EUR/USD volatility was at 60-70% of it’s usual (long term) level. Second case was observed on Friday, when UK Retail Sales numbers came out. EUR/USD volatility approached, but remained below the long term value although market volatility at the same time was 1.2 times higher than usual. Despite the number of events/data releases on Wednesday the volatility was rather subdued, just slightly above the long term values.
As most of the other currency indices, USD, ended the period of analysis below the base (opening value). The only two noticeable outperformers were the SEK and NZD Indices. The first one benefited heavily from the Eurozone data on Friday and yesterday, whereas the latter one got a boost from the Asia-Pacific data releases on weekend. USD index started the period with a 0.4% gain on the back of the New Home Sales data. That was the highest level of the index in the period of the analysis. It started to demonstrate clear bearish bias on Thursday as major data releases from other economies were coming out better than expected and US numbers, even when better than expected, weren’t that optimistic.
Index continued to trail lower on Friday as better than expected Eurozone data early in the day directed some of the capital flows from the USD. Although we saw mixed results in the data releases from the US later in the day, the good ones managed to stabilise the dollar as it hit the lowest level in the period, 0.53% below the base value. Index started to slowly climb higher afterwards as slightly better than expected, low to medium impact, data releases from the US helped it to gain 0.2%. We saw few rather low impact data releases from the US yesterday. That didn’t change much for the USD index as it ended the period 0.18% below the base value. Most of the other currency indices, showed pretty similar, 0.2% below the base value, results as well.
We didn’t sea any more of major mismatches between the EUR/USD and market (Dukascopy Bank Volatility Index) volatility patterns as it was becoming usual in the last few weeks. We saw rather few data releases on Wednesday at all, due to this, EUR/USD volatility, surprisingly, peaked till 2 times the usual (long term) level during the release of New Home Sales numbers. Range of data releases, around 3 times more than on Wednesday, kept the EUR/USD volatility fuelled till 1.8-1.7 times the normal level for most of the day. Highlight of the week was seen on Friday as Eurozone CPI Flash Estimate and Unemployment Rate numbers boosted the EUR/USD volatility level till the highest level in the period—4.6 times the usual level.
Euro index was one of the best performers last week. It was surpassed only by the aussie and kiwi indices and, despite the 1.2 cap between the EUR/CHF held by the Swiss National bank, even managed to surpass CHF index. Overall, the week was rather calm for the Euro index as the minimum and maximum values were just 0.5% from base (opening) value and we saw only one major move in the period. That was when UK’s Asset Purchase Facility and Official Bank Rate and ECB’s Minimum bid Rate were announced on Thursday. It helped Euro index to gain 0.6% on the news alone and caused it to demonstrate clear bullish bias for the rest of the period.
Before that, however, Euro index spent clear majority of the time below the base value. Spanish and Italian Manufacturing PMI’s on Monday came out slightly worse than expected which send the euro index 0.1% below the base value. Eurozone Final Manufacturing PMI later in the day came out as expected which stabilized, but failed to reignite the confidence in the Euro. It remained around 0.1% below the base value till Wednesday. That’s when it started to slowly trail lower and hit the period low, 0.5% below the base value, right before the mentioned UK’s and ECB’s data releases on Thursday. JPY was the worst performance last week. It suffered heavily from the changed risk appetite and comments by the advisors to the Japan’s 1.26 trillion USD public pension fund.
We saw a slight decrease in volatility last week. Elevated volatility in the market (Dukascopy Bank Volatility Index) was observed in 28% of the time whereas historic average is at around 35%. Same gauge in the currency pair’s was noticeably below historical levels as well. Besides that, average volatilities of currency pairs were below the usual (long term). Substantial volatility levels were seen only in CHF crosses, which most likely happened due to informational noise created by the recent referendum vote on quotas for immigrants to the Switzerland. The highest EUR/USD volatility, 3.8 times the usual level, was observed on Thursday. That’s when UK’s Asset Purchase Facility numbers and rates from BOE and ECB where announced.
The six-month and three-year global economic expectations worsened in February, a Dukascopy Bank SA poll showed. The six-month economic sentiment index declined 0.02 to 0.62, after declining to 0.64 in January. The three-year economic outlook deteriorated 0.04 to 0.69.
Respondents became more pessimistic about the six-month and three-year European economic outlooks in February. The six-month economic sentiment index declined 0.01 to 0.52, the lowest level since September 2013. The three-year outlook worsened 0.04 to 0.60.
The North American economic outlooks also deteriorated. The six-month and three-year indices tumbled to 0.69 and 0.71, down from 0.73 and 0.80, accordingly.
The Asia-Pacific six-month month and three-year economic expectations were little changed at 0.66 and 0.76, respectively.
Figure 3 presents the term structure of the Dukascopy Bank Sentiment Index (Y-axis) mapped against GDP growth forecasts made by poll respondents (X-axis). Overall, DBSI values and GDP growth forecasts match directionally, suggesting the global economy will perform better three years from now.
Respondents revised the European six-month and three-year economic growth forecasts to 0.50% and 1.13% in February, from 0.62% and 1.17% respectively in January.
Poll respondents suggest that the North American economy will expand an annualized 1.83% six months from now and 2.27 three years from now.
The Asia-Pacific economic growth projections are the most prominent. Experts forecast growth of 3.36% and 3.90% six months and three years from now respectively.
Figure 4 presents the business cycle and its phases - expansion (real GDP is increasing), peak (real GDP stops increasing and begins decreasing), contraction or recession (real GDP is decreasing), and trough (real GDP stops decreasing and begins increasing).
Respondents are divided on the European six-month EDS. Ten claim the economy will be in a recession while eleven say the economy will be expanding.
Experts support the view that the North American economy will be expanding both six months and three years from now.
Experts are united about the Asia-Pacific 3-year EDS – twenty three experts forecast expansion and two say the economy will reach its peak.
JPY index, surprisingly, was the best performer last week closing 1.34% above the base (opening) value. However, as we can see from the graph, this happened mainly due to the gains yesterday which occurred due to changed risk appetite as anxiety over Ukraine renewed. On Friday last week, Yen index lost around 0.4% as better than expected US Non-Farm Employment Change data redirected some of the capital flows towards USD. However, we saw a rather sharp recovery soon after. JPY index remained around base value till Tuesday. That’s when JPY index gained 0.35% as investors tried to dodge risk due to concerns about China’s economic health and fallen US stock indices.
Additional, 0.3%, boost came on Wednesday as BOJ Monthly Report and Consumer Confidence boosted the trust in Yen as a safe haven currency. After that, however, we saw the JPY, together with USD, index to trail down until Friday’s noon.
JPY posted gains against all of it’s counterparts. The smallest one were 0.35% against NZD, which was boosted by the RBNZ, and 0.69% against CHF, which also, as Yen, benefited from the changed risk perception due to the anxiety over Ukraine. Gains against Euro, greenback and Swedish krona were around 1.2%. Gains against pound, which was hit heavily by the FX oversight by the BOE scandal, amounted to 1.9%. The biggest gains in the period, almost 2%, were posted against loonie which suffered from the US and Canadian data releases on Friday’s noon last week.
Despite the political tension in the US and Europe over Ukraine we are continuing to observe rather low levels of volatility in the market. Elevated volatility (above usual) in the market observed in 26% of the time although historical average would be around 30-35%. We do see an increase in average volatility in some of the currency pairs, but in most of the cases it remains substantially below the usual (long term) level (Index value 1).
USD/JPY demonstrated highest levels of volatility at the end of last week. 5.1 times higher than usual volatility was reached on US and Canadian data releases on Friday noon; 4.5 times higher than usual volatility was seen on Sunday, during first hours when market opened.
Amid a lack of fundamental data from Europe, and a bunch of important economic data releases from Australia, Japan and New Zealand it was not a surprise that the single currency managed to change only by 0.1%. Moreover, despite a fluctuation in a 135-pip range, the most traded currency pair was almost unchanged over the observed period. With almost 70% of opened position being short on EUR/USD and with the single currency being sold in 64% of the time, it was not a surprise that the Euro index remained around the base value in the first half of the week and moved lower closer to Friday. The U.S. Dollar index lost only 0.27% even despite positive retail sales and jobless claims on Thursday.
Last week’s highlights were RBNZ’s meeting and a series of reports from Japan, as ahead of April’s sales tax hike each set of data has stronger market impact. On Thursday the Japanese Yen rocketed 1.07% as Japan’s manufacturing data came stronger-than-expected, while renewed anxiety over China and Ukraine boosted demand for safe haven. A rate hike from the RBNZ was already priced in by markets, as constant flow of positive data pushed analysts to invest in the New Zealand currency. Therefore, the Kiwi advanced only 0.65% over the period, while more rate hikes are suggesting only further rise of the New Zealand currency. At the same time, BoE’s deputy governor’s Charlie Bean comments about too strong Pound dragged the Sterling down over the week, resulting in a 0.93% drop, and even positive manufacturing data was not able to limit losses.
Financial markets remained rather calm during the last week, with an average volatility being mostly below the historic values, while elevated market volatility was registered only in 26% of the time. Until Thursday the most traded currency pair’s volatility was below the Dukascopy Bank Volatility Index, as markets were driven by China’s CPI data, Japan’s GDP and comments from the Bank of Japan. On Tuesday EUR/USD volatility remained around 0.66, while overall market’s volatility soared to 1.17 on 16:00 GMT on jitters about Chinese growth outlook. A massive sell-off of emerging markets currencies sparked demand for Japanese Yen, with USD/JPY and EUR/JPY volatility being above the average market’s elevated volatility.
Britain’s currency was one of the worst-performing major currencies during the last five trading days, with the GBP index falling 0.52%. The biggest gainers, however, were Japanese Yen, Aussie and kiwi. Therefore, it was not a surprise that the Pound posted huge loses versus these three currencies. After a rate hike from the RBNZ on March 12, New Zealand currency received a strong bullish bias that pushed it higher over the described period. New Zealand is now the first developed economy that increasing its key refinancing rate, and according to the latest fundamental data, more rate hikes will be made later this year, hence, NZD crosses will continue their movement to the north.
AUD index climbed 1.41% as the number of employed people increased by a net 47,300 in February. At the same time, RBA’s minutes on March 18 pushed the index 0.38% higher. The Sterling was almost unchanged on March 12, staying around the base value, and after a slight drop moved back to its base value as the massive sell-off of the U.S. Dollar continued to feed Pound’s bulls. Disappointing trade figures for January dragged the gauge 0.20% lower, while Ukraine’s decision not to recognize Crimea as a part of the Russian Federation, boosted risk-aversion sentiment, pushing the Pound lower versus other major currencies. Finally, this week’s stronger-than-expected statistics from the U.K. labour market, helped the GBP index to regain some of the earlier losses, with the measure rising 0.29% in the first half of the day.
Financial markets remained rather calm over the described period, as elevate market volatility was observed only in 28% of the time. The cable itself was second most volatile currency couple, with the pair trading above normal volatility in the 34% of the time. The most attractive currency pair for investors was NZD/USD, as RBNZ’s hawkish comments and a decision to increase its interest rate pushed pair to its historically high level above 0.86. The less volatile cross was EUR/CHF, with the elevated volatility recorded only in 21% of the time. Due to a bunch of important releases from Asia and Pacific Dukascopy Volatility index during Tokyo and Sydney trading session. On March 13 Ukraine worries fuelled safe-haven demand, with volatility index rising to 2.09.
Euro index once again was “the best of the worst” kind of performer in the last 5 trading days. It outperformed only three, was surpassed by five currency indices and ended the period of analysis below the base (opening) value. There were few factors which had the biggest impact on that. First, substantially worse than expected ZEW data on Tuesday. The gauge slid below the value of 50 for the first time since October, 2013. This caused Euro index to loose 0.22%. Second, arguably the most important, factor was yesterday’s EU Economic Summit which highlighted the tension between the EU and Russia due to events in Crimea.
The period, however, started well for the Euro index as it managed to gain 0.31% on the back of better than expected Eurozone Employment Change and worse than expected US PPI numbers. Worse than expected Eurozone PPI numbers on Monday, however, dragged the Euro index back to the base value.
In the period of analysis we observed one of the rare cases when Euro posted gains against Swiss franc despite the 1.2 gap held by the SNB. This happened due to the worse than anticipated German ZEW data on Tuesday which indicated possible hardships for the Swiss economy as well.
Volatility levels in the financial markets are remaining subdued. It could be easily argued that if not FOMC Economic Projections, Statement and Press Conference on Wednesday we would be seeing even lower levels of volatility as elevated volatility in the market, and in the most of currency pairs, remains below the historical 30-35% level. Besides that, average volatilities are below their usual (long term) values in all of the cases. In general, it could be argued that three periods pretty much defined the last period of analysis. First one being the already mentioned FOMC Economic Projections, Statement and Press Conference on Wednesday. Second being the Eurozone Employment Change and US PPI numbers on Friday.
USD index was second top performed last week, while Canadian Dollar index posted the steepest decline of 0.87%. Stephen Poloz comments on March 18 pushed the loonie 0.51% lower, as he pointed out the potential weakness in the land of the maple leaf in the first quarter of 2014. At the same time, RBA’s minutes and New Zealand current account figures pushed Aussie and Kiwi indexes 0.38% and 0.48% respectively. RBA minutes showed that record-low interest rate is boosting growth. Hawkish comments from the central bank helped Aussie index to become last week’s top performer, adding 1.45% to its value. In contrast, weak wholesale sales dragged Canadian Dollar 0.87% lower.
The fact that Dukascopy traders were buying the greenback in more than 60% of time during the period helped the index to climb 0.61% over the observed period. Moreover, the greenback appreciated against all major currencies, except the Aussie. During the first half of the week, Dollar remained slightly below its base value, while moderate inflation for February forced Dollar’s index to end Tuesday’s session at 99.62. Nevertheless, it was not a surprise that FOMC statement, with Janet Yellen hinting on the first rate hike, provided a significant boost the buck, sending the gauge 0.73% above its base value. While markets can already start pricing in the upcoming rate hike, better-then-expected jobless claims and Philly Fed manufacturing index supported the case the economy is strengthening.
Ahead of the FOMC meeting on March 19 markets remained rather calm, while after the statement currency pairs were facing strong supply and demand areas that were limiting market’s volatility. Therefore, the elevated market volatility was observed only in 23% of the time. The most volatile currency pair was USD/SEK, as Federal Reserve send the greenback higher, while Danske Bank comments that sanctions against Russia can affect Finland and Sweden hampered investors’ willingness to buy the Swedish Krone, considering it as a safe haven. It is important to mention that maximum volatility among all crosses wit the U.S. Dollar was higher than the maximum market’s volatility index during the observed period.
Euro index was one of the worst performers in the period of analysis managing to clearly surpass only Swedish Krona and coming almost at par with Swiss frank. Clear indication of the underperformance is the fact that euro index spend only 1/3 of the period at or above the base (opening) value. Even when it managed to climb above it, the index could not advance higher the 0.21% level. Despite the range of Eurozone related events and data releases on Friday and Monday the Euro index remained around base value. It peaked till the period high, 0.21% above the base value, after worse than expected US Flash Manufacturing PMI data came out on Monday, but started to trail lower afterwards.
Moderate, 0.15%, recovery is seen on Tuesday when ECB president was speaking. However, that was just a temporary happening as Euro index continued to head southwards after that. Wednesday did not bring any changes in trend of the Euro index which lost 0.38% during the day. Although Eurozone M3 Money Supply data came out as expected and it seemed like it could stabilize the Euro, the worse than expected Eurozone Private Loans increased the rate of depreciation and caused the Euro index to end the period 0.92% below base value. Best performers in the period were aussie, kiwi and loonie indices. Oceanic currencies benefited from the concerns about Chinese economy as China’s central bank might intervene in to the markets in order to raise domestic consumption, raising the demand for imports as well.
Overall volatility levels remain subdued. Although some currencies demonstrate elevated volatility in 30-35% of the time, which is close to historical levels, there as quite a few cases on the lower end of the spectrum. As a consequence, elevated volatility in the market is seen in 23% of the time. Besides that, in all of the cases, market and individual currency pairs, average volatilities are at 70 to 90% of the usual (long term) level. One unusual observation in this period is that although market (Dukascopy Bank Volatility Indices) and EUR/USD volatility paths coincided, the EUR/USD volatility showed much greater magnitude of volatility—period high at 4.5, usual peaks till 2 times higher levels of volatility than usual.
USD index ended the last week in a negative territory, posting a 0.51% depreciation, as gains versus the single currency, Yen, Franc and Swedish Krone were almost unremarkable (except SEK), while loses against other major currencies were more noticeable. The Australian Dollar was last week’s top performer, adding more than 2% to its base value as even despite a lack of fundamental data, comments from Australian policymakers provided a significant boost to the currency. RBA’s Governor highlighted positive developments in the economy, saying the transition phase from mining-led demand is moving to its end. Central bank’s comments are pushing the Aussie higher for the fourth consecutive week.
The greenback remained almost unchanged last Monday, staying around its base value amid a lack of fundamental data from the world’s largest economy. However, later, after a release of disappointing manufacturing PMI from Markit, the USD gauge moved to 99.93. On Tuesday new home sales dragged the index lower, while durable goods orders a day later provided additional support for the currency, helping it to stay around 99.64. On Thursday the Commerce Department said the nation’s GDP expanded 2.6% in the three months through December, more than the 2.4% reported earlier, however, weaker than the 2.7% growth predicted by analysts. While household spending was still driving economic growth, weaker-than-excepted data dragged the USD index to 99.31.
Markets are preparing for the ECB meeting, and tax hike from the Japanese government that all will add more liquidity, therefore, financial markets remained rather calm over the week, as the elevated volatility was observed only in 24% of the time. The USD/CHF currency pair was the most volatile last week, as a bunch of important fundamental data from the United States influenced the buck, while SNB’s worrying comments about risks of deflation dragged market’s attention to the Swiss Franc. Moreover, SNB’s quarterly report resulted a 0.86% drop of the Franc. It is important to mention that AUD/USD was the least volatile pair, while it still managed to gain more than 2% over the period, meaning that the pair was steadily appreciating, without any spikes.
