USD: Currency Index & Volatility

Relative Currency Strength

However, better than expected Eurozone data later in the day boosted interest in the Euro and dragged the USD index down. Friday was heavily loaded with “soft” and unquantifiable events which were mostly aimed on the other regions or currencies. Monday and Tuesday did not bring ay major changes for the USD index. US data coming out in both of the se dates became really secondary after the WEF Annual meeting in the days before and Eurogroup and ECONFIN meetings on Monday and Tuesday.

USD outperformed only 3 of it’s major counterparts—CAD, which suffered heavily on Wednesday after the Band of Canada press conference, and aussie and kiwi which weakened on Japanese data and Bank of Japan statements on Thursday.

Similarly to the last week, USD index was one of the worst performers amongst the currency indices. It surpassed only AUD, CAD and NZD indices and ended the period below the base (opening) value. It is worth pointing out that USD index did not experience any major moves as index was 0.4% around the base value the whole period of analysis. WEF Annul meeting in Davos might have had a significant effect on this as well. Wednesday was really calm as there were no data release/event directly linked with the US or the USD. Highest level in the period, 0.4% above the base value, was reached on Tuesday early morning.

Volatility

At the same time EUR/USD was changing hands 3.6 times more intensively than the usual. Monday was relatively calm, in comparison to previous days, but German Ifo and US data managed to boost EUR/USD volatility till 1.6 times higher than the usual level. Tuesday was rather similar as well due to the range of US data coming out that day.

We had a rather turbulent week as market showed elevated volatility in 50% of the time. Individual currency pairs showed similar frequency of elevated volatility as well. In addition, average levels of volatility of individual pairs was at or well above the long term values in 7 out of 11 cases which illustrates the volatility of the markets rather well.

As it usually happens, market (Dukascopy Bank Volatility Index) and EUR/USD volatility followed the same path last week. Only noticeable difference is observed on Wednesday when UK’s Unemployment data boosted the market volatility to the level 1.4 times higher than normal level. EUR/USD volatility was below it’s normal level that time. Eurozone Flash Manufacturing and Services PMI releases on Thursday caused EUR/USD to trade 2.6 times more intensively than usual. Market volatility at the same time was 1.9 times higher tan usual. Highest levels of volatility were reached on Friday. Market volatility was 2.6 times higher than normal just before the scheduled speech by the Bank of England Governor.

Currency Significance

However, negative tendencies were clear from then on. Period low (0.12) was reached early Tuesday in the morning, but the indicator managed to recover on the data releases from the US on Tuesday.

Most noticeable mismatch in the short, medium and long term correlations between USD/EUR and other USD crosses is seen in AUD, NZD and CAD. Most likely caused by the Bank of Canada comments and Bank of Japan comments during their respectful press conferences.

We can see a marginal decreased in significance of the USD in the markets, expressed as the average correlation between the various USD crosses. It started the period at 0.28 and ended it at 0.23. It is noticeable that it showed rather clear negative tendencies through the most of the week. Data releases and other events taking place on Wednesday were not directly linked to the US which caused the gauge to show quite a few ups and downs during the day and ended it at the period high of 0.32. Eurozone data coming out on Thursday dragged the gauge till 0.21. It regained some ground when US Unemployment Claims were coming out.