USD: Currency Index & Volatility

Relative Currency Strength

However, overall attitude towards the USD remained bearish. It reached the lowest period in the period, 0.88% below the base value right before the data releases from US and Canada on Friday noon. We saw the index gaining 0.4% on these numbers and slowly inching up higher afterwards. No major changes took place on Monday and Tuesday as everyone was looking in to the Europe (Eurogroup and EECONFIN meetings). USD index kept trailing higher and ended period 0.39% below the base value.

USD posted substantial gains against JPY which still felt the effects from the comments of the advisors to the 1.3 trillion USD Japanese public pension. Gains against other currencies were around 0.25%. Losses, however, were substantial in all cases—at least 0.84%.

USD index was a mediocre performer last in the last period of analysis. It was outperformed by, and managed to outperform four other indices. However, out of the 122 hours of analysis only 12, all in the 5th of march, were spent above the base (opening) value. US Non-Farm Employment Change and Non-Manufacturing PMI ignited a clear bearish bias on the index. Better than expected US Unemployment Claims on Thursday did not manage to outweigh the importance of UK Asset Purchase Facility and Rate announcements from ECB and BOE, which dragged the USD index to the second lowest level in the period— 0.72% below the base value. Minor recovery is seen afterwards.

Volatility

What is becoming usual occurrence lately, in the past few weeks, is the elevated market volatility observed in the first trading hours of new week on Sunday. That’s when market participants are trading on and pricing in Asia-Pacific, primarily Chinese, data releases during the weekend. However, it seems this was just temporary as there are no similar events planned in the rest of the march.

Highlight of the week for the EUR/USD, in terms of trading activities, was Thursday. UK Asset Purchase Facility and rate announcements from BOE and ECB boosted the EUR/USD volatility till 3.8 times the usual level. Highest market volatility, 2.9 times higher than usual, was observed on Friday when range of US and Canadian data was coming out around noon.

Once again, as it was for a month or so some time before, we are seeing elevated tranquillity in the market. Elevated, above the usual (long term), volatility in the market was observed only 19% of the time. Most of the currency pairs demonstrated abnormal volatility in 20-30% of the time, whereas historical levels are round 30-35%. Besides that, average volatilities in the market and on currency pairs in all of the cases were below the usual levels—70 to 90% of the long term (index value 1) volatility. It is pretty safe to say that Monday and Tuesday had the biggest impact on this as due to the Eurogroup and ECONFIN meetings there were very few peaks in trading activity. The ones that happen, did not push the volatility higher than 1.3 times the usual level.

Currency Significance

Average correlation skyrocketed from 0.27 till period high at 0.58 on these numbers. However, it started to show clear southern bias soon after. Eurogroup and ECONFIN meetings on Monday and Tuesday were taking the spotlight which drew fair share of attention of the market participants away form the USD. As a consequence, the gauge trailed till 0.47 on Monday. On Tuesday, despite the medium and high importance data releases from the US, the UK related events and data releases hurt the gauge the most. It dragged the average correlation 0.16 lower, till 0.27, around where it ended the period of analysis.

Significance of the USD in the markets, expressed as average correlation between the various USD crosses, showed an overall decrease in the last period of the analysis; from 0.35 till 0.25. That happened despite the 0.30 increase in the gauge on Friday. Average correlation was round 0.30 till Thursday noon. As everyone was looking forward for UK Asset Purchase Facility and rates from ECB and BOE, it dragged the significance of the USD down till the period low at 0.20. Few minor ups and downs were observed afterwards but the gauge remained in the vicinity of 0.2 That lasted till Friday noon when range of US and Canadian data came out.