Dukascopy Research Thread

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The Japanese Yen was the worse-performing currency among nine major currencies, with the Yen index falling 1.71% during the last five trading days. The Yen declined recorded losses versus all other currencies, while the steepest declines were logged versus the loonie, Aussie and Sterling. Canadian currency posted a 1.32% gain over the period, as stronger-than-expected GDP figures for January eased some of the pressure on the Bank of Canada. At the same time, following the latest comments from the RBA and RBNZ the Aussie and Kiwi continued its appreciation, posting 0.97% and 0.22% gains respectively. Both economies are gaining momentum and with hawkish central bank’s view the appreciation is likely to continue.

On the contrary, the outlook for the Yen is not very optimistic, as after a tax hike on April 1 the economy is projected to slow down, bolstering the case the Bank of Japan will be forced to expand its stimulus programme. Currently, analysts believe that May’s policy meeting will be the most appropriate time for Kuroda to pull the trigger. Due to a lack of fundamental data on March 26 and 27 the Yen remained around the base value, however later, after a bunch of economic data failed to convince BoJ’s efforts were substantial enough to prepare the economy for a tax hike, provoked a sell-off of the Japanese Yen. Despite stable inflation figures, manufacturing data and growing uncertainty among central bank’s members resulted in a 1.71% drop, as investors began pricing in further measures by the BoJ.

The USD/JPY was highly volatile over the observed period, with major spikes representing great opportunities for investors. Nevertheless, the elevated market volatility was observed only in 21% of the time– the second lowest among other major currency pairs. However, despite the fact the elevated volatility on NZD/USD was recorded only in 20% of the observed period, the pair managed to reach the multi-year high, while kiwi index soared to its historic high, meaning that the pair followed the trend without bouncing between important support and resistance lines, making any trade on the pair less risky. In contrast, the EUR/GBP pair’s volatility was above the average in 37% of the time, as an abundance of fundamental data from the U.K. and Europe resulted in pair’s high volatility.

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Euro index was one of the best performers last week. GBP came at pat and only the USD and the CAD index managed to post slightly better, 0.15% and 0.09%, respectively, results. Almost from the very beginning of the period it started showing rather strong bullish bias. At the end of Friday it was already 0.27% above the base value. Even worse than expected Eurozone CPI data on Monday did not manage to negate this trend, just to pause it for some time. However, it resumed appreciating on Tuesday and continued to do so till the Wednesday noon. That’s when worse than expected Eurozone final GDP and PPI numbers came out. However, the impact was very marginal.

Index lost only 0.08% on the back of this data, but resumed the appreciation afterwards. It reached the highest point in the period, 0.78% above the base value, right before the ECB announced it’s Minimum Bid rate yesterday. Despite the recent economic data (below the target inflation and stagnant unemployment) ECB decided to keep the rates unchanged. This dragged the Euro index 0.2% lower, from which it did not manage to recover and ended the period 0.52% above the base value. Substantially larger impact was felt by the Swiss franc index which lost 0.43% on this data alone. This erased almost all of it’s gains in the period. Biggest looser in the period were the yen and kiwi indices, 1.17% and 1.07% loses, respectively, in the period of analysis.

We saw quite a few substantial peaks in market (Dukascopy Bank Volatility index) and EUR/USD volatility in the period of analysis. However, they were very concentrated and short term, therefore the market showed subdued levels of volatility. Elevated volatility in the market and EUR/USD was observed in approximately 20% of the time as historical levels are at 30-35%. In addition, average volatility of the market and currency pair’s is at 70-80% of the usual (long term) level. There were three major periods of excess volatility in the period of analysis. First took place on Friday last week when UK’s Current Account and Final GDP numbers came out. Second, took place on Monday when Eurozone Flash Estimate CPI showed slightly worse than anticipated numbers. The last, which took place yesterday, could be called the highlight of the week.

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These are the highlights of the recent report.
VIDEOversion of the report.

• The six-month global economic expectations improved by 0.02 in March and reached the level of 0.64, while the three-year sentiment index decreased for the second consecutive month and stood at 0.68, a Dukascopy Bank SA poll showed.
• The European six-month economic outlook recovered from 0.52, the lowest level since September 2013, to 0.55. However, poll respondents did not revise their expectations regarding the three-year index, and the reading stood unchanged at 0.60 in March.
• Experts became less optimistic about the North American region as both the six-month and three-year expectations worsened slightly. The six-month outlook declined 0.01 to 0.68, while the three-year sentiment fell by 0.02 to 0.69, which is October 2012 low.
• The Asia-Pacific economy is forecasted to expand in six-month time as the index grew by 0.04 to 0.70 in March. However, the three-year prospects became less attractive compared to the February poll’s results as the experts’ three year outlook worsened to 0.74.

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).
Majority of poll respondents consider the European six-month and three-year EDS to reach ‘Expansion’ phase, while only eleven believe economy will be in recession six months from now and eight—three years from now.
Twenty-seven experts anticipate that the North American region will experience economic expansion by October 2014 and only three believe the economy will slow down. Respondents are less optimistic about North-American three-year EDS as twenty-four consider region’s economy to expand, while six expect it to reach recession.
The Asia-Pacific economy is forecasted to grow both in the short and long term by vast majority of experts

Figure 9 presents a discrepancy in views on the economic outlook among local and foreign experts. March poll results reveal that respondents from Europe are more optimistic about the local economic outlook compared to their foreign colleagues. The same is true for the Asia-Pacific region.
Europe: Local experts are more optimistic about the European six-month and three-year economic outlook compared to their foreign colleagues, with a discrepancy in views of 0.4 for both time horizons.
North America: Local respondents from North America are more optimistic about the regional six-month outlook (0.73 vs. 0.68), however the discrepancy in views reaches –0.02 when it comes to the three-year growth prospects.
Asia-Pacific: Local respondents are more optimistic (0.78) about the Asia-Pacific six-month economic prospects compared to foreign experts (0.66). The same tendency applies for longer time span, as the discrepancy in views sheds to 0.13 for the three-year economic outlook.

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The science of prognostics has been going through a rapid and fruitful development in the past decades, with various forecasting methods, procedures and approaches flooding the economic world. It is estimated that there are more than 100 prediction methods, and sometimes the diversity makes it difficult to choose the one that would do the trick. In our new research we try and compare a few of the most popular techniques, and see if they are in fact suitable for forecasting currency exchange rates.

Results

The 5-day window SMA model gives the worst results in our analysis. The model captures the general direction of the series and the main peaks and troughs, but is not sensitive to small changes. We can thus say that the result is too smoothed. Which is hardly surprising since the forecast is just the average of the previous values. The exponential smoothing, on the other hand, gives much better results. The EMA curve not only moves in the right direction, but also shows even the small motions of the price. In this case a lot depends on the choice of the constant α. We use α=0.8, therefore putting the largest weight on the last observation. Visually, however, it is obvious that the best results come from ARIMA(1,1,1), DLM, and ANN(3-2-1) - their predictions practically coincide (see Figure 4).

All forecasting curves are lagged behind the real values. On of the reasons for this is the strong autocorrelation in the series, but the main cause of the forecast delay is the huge weight of the previous observation in the models. All mentioned techniques increasingly depend on the last value of the time series, with SMA and ANN being the only exceptions. SMA5 puts equal weights on all five last observations, while ANN fits weights values for the three previous data points. As this forecasting bias seems to be rather considerable, it is natural to wonder whether it is altogether worth it to take trouble over the models. Thus we compare our results to the ones we would obtain by simply assuming the present value of the prediction to be equal to the observation in the previous time moment.

Conclusion
We have studied five forecasting models with different construction techniques and levels of difficulty. In total, all received results followed the general motion of the real series, some showing slightly more precision than others. Notably, the forecast given by the classical ARIMA model was even better than the results of more complex DLM and ANN. As ARIMA is also easier and faster to employ, the superior results make it unquestionably the best forecasting method in our study. However, SMA and EMA models are also very simple in both understanding and realisation, with SMA giving the most smooth curves, but EMA being more dynamic. So if the high precision of the forecast is not the main target of analysis, both these methods can also be used.
It is noteworthy, however, that all the models give lagged, or delayed, predictions, and do not offer much superiority over a simple lagged series. Such outcome is dictated by the nature of time series – it is non-stationary and strongly autocorrelated. Therefore, in cases when pointwise and indefinably accurate predictions would suffice, it might be more sensible to save time and effort, and use the lagged series.

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Dear traders,

We entered this year full of optimism and hope, as our worries over the USA economy did not materialise and the overall situation in the world seemed to be improving. However, geopolitical tensions emerged and took us by surprise, revealing that at the very least the near future is not going to be characterised by stability and calmness. Since the latest events are highly unlikely to go unnoticed in the context of global economic recovery, a return to the risk-on environment, which was expected to develop in early 2014, will be postponed.

Unfortunately, this is not the only reason to remain cautious and doubtful this quarter. The 18-nation bloc is currently battling with stagnating price growth. We are all well aware of the possible implication if the right action is not taken in time. And even though Japan looks to be close to achieving success by exiting the vicious circle, as inflation is currently fluctuating around 1.5%, this example forced the Federal Reserve, as it now seems, to do a little in excess of what was required in order to rule out any possibility of facing deflation.

In the meantime, the European Central Bank, led by Mario Draghi, refrains from any bold measures for the moment, even though the Euro is on the rise. This tendency of the currency to appreciate may further aggravate the situation, as it increases the risk of declining prices. As a result, many of the economists expect the monetary authority to turn to unconventional easing measures in order to veer the union’s economy away from the spiral the Japan’s economy found itself back in the 90’s.

And although the aforementioned may create a somewhat gloomy representation of reality, it serves it just reminds us to ‘trust, but verify’ and to never forget about hedging. Always being ready for the worst possible course of events in order to take proactive measures and prevent them from taking place or at least limiting the potential negative impact of the unwanted events is one of the keys to success in the long run.

Kind regards,
Alexander Suhobokov, CFA, FRM
Head of Research
Dukascopy Bank SA

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The Swiss Franc was one out of four losers during the last five trading days, with CHF index posting a 0.68% drop. At the same time, other currencies that are considered as safe-haven, including the Yen, Aussie and kiwi, posted solid gains. The Yen soared 1.7% over the period, as together with risk-on sentiment, comments from the Bank of Japan diminished hopes for fresh stimulus soon, resulting in a strong interest in the Yen. Moreover, the currency is likely to appreciate further, as weak labour data from the United States dragged the USD 0.55% lower, while boost the Bank of Japan is unlikely to be short-lived. The single currency was steadily depreciating over the observed period following ECB’s meeting.

Refreshed Ukraine tensions were the main reason why investors looked forward a less riskier asset during the last five trading days. Swiss Franc is considered to be one the most attractive currencies for investors when the risk-on sentiment prevails the market. Nonetheless, hawkish RBA and RBNZ as well as confident speech from BoJ’s Kuroda, made other safe-haven assets more attractive than the Alpine country’s currency. Even positive fundamentals from Switzerland were not able to change the sentiment. The CHF index never moved into the positive territory over the described period, suggesting even stronger-than-expected inflation, foreign currency reserves and retail sales has modest impact on financial markets.

Even an abundance of important economic releases and central bank’s comments were not able to provide a significant boost to markets, with elevated market volatility recorded only in 19% of the time. The main reason for such a calm session was a lack of data this Monday and Tuesday, with only the BoJ’s meeting having a significant impact on markets. Remarkable that the most traded currency pair was the least volatile even despite Mario Draghi’s hints about the possible implementation of the U.S.-style quantitative easing. In contrast, the USD/JPY pair was the most volatile, with the elevated volatility being in seen in 37% of the observed period. BoJ’s Governor’s Kuroda’s confidence dragged attention to the Yen, with the pair plunging to 101.55.

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Highlights of the latest Market Research on EUR:

The Euro index remained virtually on the same level throughout the week, moving in the narrow band between 99.5 and 99.8. It reached its lowest point on Wednesday morning, losing more than half per cent of the initial value. Later on, seemingly in anticipation of German and British trade balance and ECB Monthly bulletin releases, the index started its slow growth and crossed the 100 points mark by Friday, resulting in a 0.17% change. With that the EUR index significantly outranged the USD and the SEK indices, and took the lead over its GBP, CAD, and kiwi counterparts that were ahead of it during the whole period.

Other currency indices were more active during the period. The lowering of the unemployment rate in Canada caused a sharp rise of the CAD index in the yellow area, giving it a good head start. But the impulse did not last, and the index ended the period with a 0.34% loss. JPY, AUD, and NZD were steadily rising during the week, but the Japanese currency was the only one that managed to preserve the direction and thus ended up in the leading position.
Worse than expected values of US unemployment rate and Non-Farm Employment Change, in turn, initiated a lengthy fall in the USD index, leaving it with a 1.26% loss at the end of the period. European currencies seemed to start off following the lead, but, for the most part, managed to recover further into the week.

[Harley_Savage]

I came accorss with a fair amount of research about dukascopy europe which seems good.

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USD currency index was one of the main losers during the last week, posting losses versus seven out of eight other major currencies. The only currency that posted even steeper decline was the loonie. Canadian Dollar plunged 1.21% over the week, as the nation’s building permits for February disappointed markets to the downside, falling most in five months. Moreover, even a more positive picture of Canada’s corporate sector was not able to provide a significant, long-term bullish bias for the loonie. In contrast, the Japanese Yen gained 1.15% over the described period, as the Bank of Japan refrained from additional stimulus, citing stronger growth and a pickup in inflation.

The U.S. Dollar lost 0.91% of its value during the last week, with the corresponding index staying mostly around 99.23 over the period. The currency began its depreciation on Tuesday, as investors slashed their Dollar long positions ahead of the FOMC minutes, while positive data from the U.K., Europe and confident BoJ’s comments added to the USD’s losses. The index reached its lowest level in the week on Wednesday, falling to 98.72 immediately after the release of the FOMC minutes. According to the minutes, the Fed officials are concerned over low inflation rate in the U.S., as they had predicted that a strengthening U.S. economy would boost inflation from 1% towards the healthy 2% target, associated with a robust business activity. Harsh winter conditions had stronger impact on the economy, hence, the Fed is projected not to accelerate the pace of the tapering process.

Over the last week the most traded currency pair was almost twice less volatile than the overall market’s volatility, due to a lack of important fundamental data from Europe and the United States. While the elevated volatility on EUR/USD was observed only in 16% of the time, the most volatile currency cross was USD/JPY, as Japanese central bank maintained the current pace of the stimulus programme, sticking to its upbeat assessment of the economy, as the impact of the sales tax is still unclear. Even Kuroda’s comments were able to push pair’s volatility only to 2.1%, however, later, the average volatility stayed around 1.1%, making the pair highly attractive for traders, as the pair moved to 101.32, after a massive sell-off.

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The Sterling index was one out of five major currencies that posted gains during the last five trading days, advancing 0.28%. Such an incremental change can be explained by the fact Mark Carney made it clear the Bank of England will not raise interest rates any time soon, until the remaining slack is eliminated. The central bank focuses on the wage and productivity growth, meaning that only statistic from the labour markets can be a major catalyst for the Sterling. At the same time, the Swiss Franc was the top-performer, climbing 0.85%, as renewed tensions in Ukraine boosted risk-on sentiment. In contrast, the kiwi and Aussie declined after a solid rally several weeks earlier.

GPB index fluctuated between 99.63 and 100.22 over the period, supporting the case that even important fundamental data has little impact on the currency. On Wednesday, a release of the stronger-than-excepted trade balance pushed the index to 99.97 from 99.92 earlier. Later on, the cable was trading in a narrow range following the Bank of England meeting, as policy makers offered no surprises, staying pat both on the interest rate and the stimulus programme. The GBP/USD pair moved slightly lower on Thursday, trading around 1.6764 level, posting no impressive moves amid soporiferous central bank’s meeting. Even hawkish comments from George Osborne were not able to provide any boost to the Pound, with the index ending a period at 100.22.

Over the observed period, both the cable and the overall market remained mostly in the tranquil zone, as FOMC minutes, Bank of England meeting and a bunch of fundamental data from the world’s largest economy were not able to push GBP/USD volatility and Dukascopy Bank volatility index above 2.74 and 2.15 respectively. The most volatile currency pair was NZD/USD, with the elevated volatility being observed in 43% of the time– almost a half. On Tuesday, April 15, the pair sank to 0.8596 after a release of the disappointing inflation figures from New Zealand, as falling imports prices outweighed a surge in utilities. The least volatile was EUR/GBP, as a lack of events from Europe and no surprises from the U.K. resulted in a modest performance.

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The EUR Currency Index remained virtually unchanged throughout the previous week, giving up only 0.03% of its value. Even the six month period did not see the single currency undergo considerable changes, with the euro index gaining modest 2.46%. The index suffered some sharp declines in the begging of the depicted period, bottoming on Monday with a 0.47% loss. On Tuesday the Euro started a slow recovery, but an excessive decline in the German ZEW Economic Sentiment made a contribution to the minor and brief fall of the index. The Euro reached its highest value of 100.08 on Thursday, and by the end of the period came back to
the initial level.

Better-than-expected Retail Sales and Unemployment Claims provided good support for the USD Currency Index, which spent the week gradually growing and ended the period with a 0.66% gain. It underperformed only relative to the Sterling, which saw rapid appreciation due to a dip in the UK Unemployment Rate and as a result surged 0.69% over the base value. The Australian Dollar and its New Zealand counterpart
were the most dynamic during the week – on Monday the indices reached their highest points of 100.73 and 100.77, respectively, but later they plunged even at a higher rate and ended the week close to the starting level. In turn, the biggest losers of the week were CHF (-0.26%), JPY (-0.40%) and SEK (-0.59%).

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Both liquidity and volatility are usually reduced by market holidays in various countries and seasonal periods of subdued market interest, like the late summer and around the Easter and Christmas holidays. Moreover, there is a lack of important fundamental data during these days, therefore, markets are mostly driven by speculations or by the demand for safe-haven currencies. The Japanese Yen depreciated over the last five trading days, with JPY index posting a 0.48% drop, mostly due to the risk aversion caused by Ukraine tensions and disappointing data from the world’s largest economy. At the same time, the Sterling has received a strong bullish bias from the upbeat labour data, resulting in a 0.71% gain.

While most of the major currencies ended a period with a high level of divergence from the base value, all gains or losses were muted due to subdued volatility. Kuroda’s pledge on April 16 to adjust central bank’s monetary policy if needed pushed the index to 99.64, however, a day later the USD/JPY failed to retest the key resistance at 102.50, also following Kuroda’s comments. This time he pointed out that the economy remains on a steadily improving path and pledged the 2% inflation target will be reached within the planned period. On April 20, the Ministry of Finance unveiled a trade balance for March, saying the trade gap soared to 1.45 trillion yen up from 356.9 billion in the same month a year earlier. Even disappointing exports data were not able to provide a massive sell-off, with JPY index hovering around 99.70.

As we already mentioned, currency trading remained very quiet over the observed period, as many dealing centres were just coming back from Easter holidays, while economic calendars across the major economies were almost barren. Therefore, it was not a surprise that elevated market volatility was observed only in 10% of the time, with the volatility index hitting a high only of 1.4, and averaging 0.7. One of the least volatile currency pairs, EUR/CHF, were 40% even less volatile than the market itself. In contrast, unemployment rate, business confidence and leading index from Australia, as well as reports form the world’s largest economy were pushing AUD/USD, with the elevated volatility observed in 21% of the time.

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The Euro Currency Index was amongst the calmest performers again this week, but managed to finish the period with a 0.15% gain, sharing a virtual third place with GBP. The index entered the week on a mild downtrend, but climbed up rapidly in the Wednesday turquoise area. The surge was greatly fueled by the sharp appreciation of EUR/AUD against the background of weak CPI in Australia, and supported later on by the German and European services and manufacturing data exceeding expectations. The momentum did not last, however, and the index spent the last day of the period on a much more modest uptrend, induced by IFO business climate and expectations indices. The rise was briefly interrupted in the midday, as EUR fell sharply against its peers, but the index quickly recovered.

The last week was a particularly tranquil one for the market. While the per cent of the elevated volatility index of EUR/USD was only slightly below the result of the previous period, the fall in the market volatility was much more noticeable, lowering the measure almost twofold. A similar situation was observed for the other currency pairs as well. Even EUR/CHF volatility index, despite a relatively high maximal value, was below its historical levels throughout the most of the week.

The week was marked by a notably strong correlation between the most traded currency pair and the Euro crosses. EUR/SEK joined EUR/CHF in having periods of high negative correlation with EUR/USD, crossing the -0.2 limit even with its mean value. It resulted in the measure being unusually varying compared its historical values, and having heavier negative tail. EUR/CHF and EUR/USD correlation itself moved far to the negative side of the historical distribution, and finished the period with significantly negative correlation with EUR/USD and EUR/GBP. The positive relationship between EUR/USD and EUR/GBP, and EUR/USD and EUR/CAD also ended up on a significant level – a sharp contrast to the weak final values of the previous periods.

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USD index was almost unchanged over the observed period, registering a 0.06% decline on Friday. A bunch of economic data from the U.S. housing market, as well as weekly unemployment claims and durable goods orders– a main proxy of overall production, had little impact on the U.S. Dollar, with the corresponding index fluctuating around the base value. The index climbed to 100.138 on March 24, hitting the highest over the period, as demand for the long-lasting goods was stronger than it was initially expected in March, meaning that American companies are shrugging off effects of harsh winter, hence, the economy will gather pace in the coming months. This week the currency is likely to be highly volatile, due to a slew of important fundamental data, including advance GDP, Janet Yellen’s speech as well as payrolls and unemployment rate.

Compared with the previous week, markets are getting more active, as effects of Easter holidays began to wane. Elevated market volatility was observed in 18% of the time. The most volatile currency pair was the USD/SEK, with elevated volatility recorded in almost 30% of the observed period. Unemployment in Sweden picked up to 8.6% in March, and keeping in mind FOMC statement later this week, the pair has a great opportunity to penetrate an important resistance at 6.6257, with the outlook remaining bullish as long as the 6.3209 support level remains intact. In contrast, the least volatile pair was AUD/USD, with volatility reaching the turbulence zone only in 14% of the time.

As always, the U.S. Dollar played a significant role in financial markets over the described period, especially keeping in mind a bunch of important fundamental data. The average correlation coefficient turned lower in the first half of the week, as due to a lack of fundamental data, markets were mostly driven by a demand for safe haven assets. On Tuesday, at 2:00pm GMT the National Association of Realtors unveiled the first set of statistical data, saying the number of existing home sales climbed above the forecast. The average correlation coefficient, however, moved to 0.290 from 0.293, meaning that traders little attention to the report.

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The rally that has been seen on Aussie and kiwi are finally running out of steam, as both South Pacific currencies posted solid loses over the last five trading days. At the same time, major currencies like the Euro, greenback, Yen, Swiss Franc as well as the Sterling remained almost unchanged. The main gainer was Canadian Dollar, posting a 0.9% gain, despite Stephen Poloz comment’s the rate-cut option is still alive. Earlier the currency was pushed higher by strong retail sales and optimistic data from the U.S., as durable goods orders surprised markets to the upside, meaning demand in Canada’s largest trading partner is picking up.

The Sterling remained almost unchanged over the observed period even despite an abundance of important fundamental data from the U.K. On April 23 the GBP index remained in the negative territory, as BoE minutes showed policymakers are divided in their definitions of the “remaining slack”. On Thursday and Friday, CBI realized sales as well as retail sales surprised markets to the upside, however, both reports were able to push the Sterling index only up to 99.95. The Pound was highly volatile after weaker-than-excepted GDP figures this Tuesday. The economy accelerated in the first quarter of this year, as all key pillars, including manufacturing, construction and services sectors posted solid gains. Nevertheless, the figure fell short of analysts’ expectations. It seems that markets got used to the upbeat readings from the U.K.

Despite only a 0.09% change over the period, the cable was highly volatile, with the elevated volatility observed in 30% of the time. It means that the GBP/USD pair was slightly more volatile than the market in general. Meanwhile, volatility confirms that investors are losing their interest in the Aussie and kiwi, with elevated volatility on AUD/USD and NZD/USD observed only in 12% and 20% respectively. The most volatile pair was USD/SEK, with Swedish krona weakening to the two-year low against the U.S. Dollar. The Krona turned lower amid concerns the central bank will cut interest rates at least once later this year, in order to dampen the excessively strong demand for the currency. At the same time, retail sales in Sweden disappointed markets.

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The Euro Currency Index dropped 0.13% - a record low among the results for the past month, - as the single currency finished the period on the losing side against most of its peers. The overall performance, however, was far from worst, with the index climbing steadily up in the beginning of the week. But the run-up was cut short by the disappointing CPI data, first from Germany on Tuesday and then from the Eurozone a day later. Though there was a short recovery in the end of the Wednesday Purple area, when the EUR index crossed the 100 point mark as some of the other indices experienced a sharp fall, the strength of the single currency still met the end of the period below the base value.

The last week of April was rather turbulent for the single currency. The volatility indices for the Euro crosses stayed elevated more often than the overall Dukascopy Bank Volatility Index, and even the average values were on the higher levels compared to previous periods. The most traded currency pair’s volatility index reached a notably high level of 3.6 on Wednesday, when the lower-than-expected Eurozone CPI pushed the 18-nation currency down. Another peak three times above the historical level was reached a day prior and under the similar circumstances, with the low Germany CPI playing the role of a downforce for EUR.

The past five days were the period of extremely strong correlation for the majority of the Euro crosses. During the start of the week EUR/USD – EUR/CHF and EUR/USD – EUR/CAD with the average correlation of -0.62 and 0.82, respectively, retained the leadership in this regard. In total, the Euro started the week with appreciation against almost all major currencies, thus moving the average correlation slightly upwards. The first real surge was observed on Tuesday, against the background of negative news on both Eurozone and Germany. Both lower-than-previous and lower-than-expected Eurozone Sentiment and German CPI releases caused the Euro to drop, and all pairs with EUR were driven by these news.

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These are the highlights of the recent report.
VIDEO version of the report.

Dukascopy Sentiment Index shows that academic experts have become more optimistic about the short and long term outlooks for Europe, North America as well as the global economy, with the corresponding gauges inching higher. However, professors lost some of their faith in the Asia-Pacific region even despite brighter economic prospects for New Zealand and Australia. This might be due to the fact that China’s economy has been slowing further, while Japan decided to hike sales tax, which is estimated to significantly affect the fragile economic recovery in the world’s third-largest economy.
Professors appeared to be even more upbeat when assessing the North American economy compared to the previous month’s results, as the economy shrugged off the harsh winter. Six-month outlook rose 0.04 to 0.72, while the three-year sentiment advanced 0.06, posting the biggest increase amidst other regions.
The measure of Europe’s outlook continues to move in the uptrend which started in March, following a decrease in the first months of the year.

Figure 3 represents the term structure of 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 for the European economy six months from now surged to 0.93% from 0.77% in the previous month, reaching the highest level this year. The same applies to the three-year growth outlook, with the corresponding measure increasing to 1.53% compared to the March figure of 1%.
Experts revised upwards their six-month economic outlook for North America, expecting the region’s economy to expand 1.87% in October 2014, up from 1.83% growth rate predicted in the March report. As to the three-year growth outlook, it appears that professors were more upbeat during the winter months, anticipating 2.53% and 2.27% expansion in January and February, respectively. As spring has come, they have become less confident concerning the growth of the U.S. and Canada, with the anticipated growth rate standing at 2.13% in the April report.
Asia-Pacific economic growth is expected to post slightly lower figures both in the medium and long term. Since the beginning of the year there have been fluctuations in professors’ expectations. In April, their forecasts were not that optimistic compared to the prior month. Thus, they saw the region’s economy growing at 3.23% pace in six months and at 3.53% in three years.

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).
The number of respondents who predict the European economy will move up along the business cycle curve in the near and long term increased in April, with 15 of those surveyed expecting the economy to reach the expansion phase six months from now, while 22 professors see the economy moving further away from the recessionary territory.
The same picture is seen in North America, where the majority (27) of respondents anticipates the economy to enter the expansion phase in the short term. 3-year EDS also speaks in favour of further movement to the Business Peak territory.
More and more people expect the Asia-Pacific region to reach the Business Peak, with the corresponding number having increased to from 1 seen in March. However, the 3-year EDS seems less optimistic compared to March findings.

Figure 9 presents a discrepancy in views on the economic outlook among the local and foreign experts. April poll results reveal that respondents from Europe are more optimistic about the local six-month economic outlook compared to their foreign colleagues. The same is true for the Asia-Pacific and North American regions. However, the picture is quite different when comparing professors’ long-run economic assessment.
Europe: While local experts evaluate the region’s economy more positively over the next six months, with the discrepancy in opinions being 0.05, they seem to underestimate European economy over the long term period, as foreign experts feel more upbeat when assessing three-year economic prospects (0.63 vs. 0.65).
North America: Local respondents from North America are more optimistic about the regional six-month outlook (0.73 vs. 0.71); however, it appears that both local and foreign professors are unanimous when it comes to the three-year growth prospects.
Asia-Pacific: Local experts constantly tend to be more upbeat about their economic situation than their foreign colleagues over the past four months. In April the discrepancy in views rose to the record of 0.2 for the short term outlook and 0.25 for the tree-year sentiment.

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Highlights of the latest Market Research on EUR:

The past week was relatively stable for the single European currency. Throughout the first four days the Euro Currency Index was, on average, at the 99.95 level, almost at the base value. Nevertheless, EUR ended the period at 99.43 mark, losing about 0.52%. This fall was the most considerable since March 2014. On Thursday morning the EUR Index climbed above the base value, reaching the value of 100.02, but at the time of the ECB Monetary policy statement and press conference it begun to decrease. The reduction continued up until the end of the period.

The past week was notably calm for both the market and the Euro crosses, with periods of rising volatility less frequent and less prolonged than usual. Two of those periods, however, could be marked as extraordinary turbulent, as they saw most of the volatility indices reach far into their historical maximal levels. The first period, indicated by the yellow area, was accompanied by the releases of the US Nonfarm Payrolls and Unemployment Claims, both better than previous and expected, and a decline in the single currency. The purple area, in turn, covered mainly the news from the Eurozone itself. Here volatility started to rise with the announcement of the ECB Interest Rate Decision and reached its peak against the background of the ECB press conference.

The past five-day period was interesting for its strong negative correlations between various currency pairs. From Friday noon to Tuesday midday unprecedentedly strong negative correlation levels were observed in EUR/USD–EUR/CHF and EUR/GBP–EUR/CHF combinations, with average values at -0.74 and -0.6, respectively. Moreover, EUR/USD–EUR/JPY, which usually demonstrates positive correlation above 0.5, slid as low as -0.42, with -0.27 average over the period. During the second half of the week correlations remained at their historical levels, with the exception of the sharp appreciation on Thursday’s afternoon. Thus the average correlation for the Euro crosses ranged from -0.04 to 0.43.

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Last week’s main highlight was ECB’s press conference and the minimum bid rate announcement on Thursday. Draghi’s pledge to act in June pushed the single currency 0.69% lower over the week and what is more important, the currency is likely to remain under the pressure until the next policy meeting. In contrast, the Aussie soared 1.54% on the back of stronger-than-expected Chinese fundamentals as well as better domestic jobs data. At the same time, the RBA’s May meeting and the gathering of the Bank of England had muted impact on markets, as policymakers at both countries reduced speculations for a revision of their monetary policies any time soon.

It was a relatively calm week for the U.S. Dollar, with only services PMI, trade balance, jobless claims and Janet Yellen’s speeches on the economic calendar. A report from the ISM had almost no impact on markets, with the currency index standing around the base value. On Tuesday, the currency remained under pressure ahead of the trade balance, which missed markets’ forecasts, while exports still posted a bigger gain than imports. The reaction was not really impressive, however, the index reached the lowest level in a week, hitting 99.33. The second half of the week was slightly more optimistic for the Dollar, as Yellen said policymakers are hoping for a highly anticipated spring revival in economic growth, which is likely to receive a boost from increased business hiring and consumer spending. This resulted in a 0.26% gain.

As we already mentioned, there was a lack of important fundamentals from the world’s largest economy last week. Hence, the most traded currency pair was mostly driven by events from Europe. Overall, markets were calm as well, even despite three policy meetings over the period. The elevated market volatility was observed only in 28% of the time, meaning that investors are less interested in policymakers’ comments. Weak disappointing statistics from Sweden, as well as comments from the central bank that eight largest banks are underlined the risks from borrowing. These worrying signs made the USD/SEK currency pair the most volatile among others, with the pair trading in a turbulence zone for 39% of time.

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After staying around the base value on May 7, five out of nine major currencies posted more than a half per cent gain or loss. The Euro and the Swiss Franc posted largest losses on the back of weaker-than-expected inflation from Switzerland, ECB’s press conference and disappointing data from Germany. In contrast, the loonie, greenback and Aussie posted 0.51%, 0.66% and 1.33%, respectively. At the same time, the kiwi remained almost unchanged, posting just a 0.27% gain, suggesting there is a waning interest for New Zealand currency. This is a good sign for the RBNZ, who already claimed that future rate hikes will depend on the strength of domestic currency.

The Sterling remained around the base value for most of the time, expect May 9 and 14. Last Friday, despite stronger-than-expected trade balance and manufacturing production from the U.K., the index fell to 99.71. During the next several days the index moved back into the positive territory, as investors were expecting the Inflation Report to shed light on central bank’s future moves. On Wednesday, however, weaker-than-expected labour market data and a lack of action from the Bank of England dragged the GBP index sank to the lowest level over the period, hitting 99.52. Further decline is also expected, as Mark Carney disappointed markets once again, even despite saying the remaining slack has fallen to 1% from 1.5% expected in February’s report.

The cable together with USD/CAD and USD/SEK were the most volatile currency pairs over the last five trading days. Canadian currency benefited from strong Chinese and domestic data, while disappointing statistics from Sweden raised concerns of the immediate action from the central bank. All these factors resulted in a high volatility and stronger interest for currencies. In general, markets remained rather calm, with elevated volatility observed in 26% of the time, as markets have chosen a fresh course after Mario Draghi signalled central bank’s readiness to act in June in case fundamentals continue to deteriorate. Meantime, Swiss Franc crosses remained one of the least volatile, once again supporting the view interest in Franc is waning.