AUD: Currency Index & Volatility

Relative Currency Strength

The Bank of England has recently changed bullish stance it had preserved earlier this year, and this fact is dampening the Sterling’s perspectives. The spread between AUD and GBP Index reached 3% in course of the observed period. The Australian Dollar was supported by a rebound in commodity prices, which started to recover after significant losses one week before. On top of that, the Governor of the Reserve Bank of Australia argued Tuesday that he believes additional rate cuts may not help the economy. Market considered his speech as a rather hawkish one, which provided AUD with another up-leg on Nov 24. RBA intends to watch closely Capex expenditures and other investment decisions of firms. Meantime, the AUD Index traded at 101.84 points by Tuesday evening.

Last week was extremely busy, with different types of fundamental data releases. Apparently, almost all of them were published outside Australia, which is the main currency of discussion this time. Despite the mentioned fact on the lack of news, the Aussie used to be the most bullish currency of the period ended November 24. During the first part of the week it shared leadership with the New Zealand Dollar, which eventually gained 1.08% in five trading days, while AUD rallied by 1.84%. A clear loser was the British Pound, which was actively depreciating on Tuesday after comments from BOE Governor Carney who said that interest rates will rise very slowly.

Volatility

Average turbulence of the Aussie was 0.79 points in the five previous days, which lagged behind the market mean by only one basis point. However, it is worth underlying the period-end events caused the biggest portions of volatility, while first days of the week were light and calm. AUD Volatility Index saw its first weekly gain on Thursday when the ECB published its minutes from the latest meeting. More pronounced turbulence was observed on Monday when several Euro area countries were able to brag about better-than-estimated activity in production and services industries. Period’s highest measure of turbulence at 2.06 points was reached in time of Glenn Stevens’ speech on Tuesday where he called into question another RBA rate cut in the near term.

The Aussie’s volatility was broadly following other countries’ events, which made it quite dependent on other regions to see somewhat more active trading throughout the weekly period ended on November 24. Considering lack of local statistics, the AUD elevated volatility of 15% can be logically justified. Moreover, it lingered behind the all-market uplifted volatility indicator of 19%. Only the AUD/USD cross was shaken up slightly more than other components, mainly due to large presence of US fundamentals last period, including second-revision GDP and FOMC meeting minutes. Here the elevated volatility reached 23%.

Currency Significance

The weekly mean correlation coefficient posted a reading of 0.54 points during the five-day period ended Nov 24. The number has broadly matched monthly, semi-annual and yearly averages of 0.53-0.56 points. The most correlated component was AUD/SEK and AUD/EUR (0.82 points), meaning these crosses were united on the Aussie and were strongly driven by this currency, rather than by the Euro or Swedish Krona separately. The composite was limiting its gains by 0.60 points until Tuesday when the previously mentioned speech from RBA Governor Glenn Stevens pushed it towards the weekly high of 0.85 points. These uplifted levels were kept until Tuesday evening, albeit inside a marginally lower range of 0.76-78.

Significance of the Australian currency calculated as an average correlation between various pairs of this currency and measured by the composite indicator stood at largely high levels from last week’s Wednesday until Tuesday of this week. Initially correlations used to be subdued, partly due to behaviour of several separate components that turned red at some points of time. The vast majority of components, however, hovered firmly in green but failed to completely avoid situations with low or negative correlations. As a result of that, some components used to have their tails extending somewhat below zero last week.

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