USD: Currency Index & Volatility

Relative Currency Strength

The observed currency indexes posted another wide range of weekly changes, with some of the measures turning tables on their previous results. The most notable change of mind was showed by the yen’s gauge, which was pushed 2.5% below the baseline by the BoJ decision to introduce a negative interest rate on January 29. Then the index became the period’s worst performer, but in the past week it managed to pare some of the losses, posting a 2% growth over the base value. Similarly, the previous week’s second worst, the CHF Index, became the second best. The Euro’s gauge, in turn, remained on the third position. Meanwhile, the previous winners, the Loonie’s and the Aussie’s measures, lost the momentum and fell into the bottom-3.

The USD Index became the week’s worst performer. It started off slightly below the baseline, but went into a real downslide on Wednesday, when the New York Fed President Dudley’s comments weighted on the market’s expectations for future rate hikes. The movement spread into the next day, further fuelled by greater-than-expected jobless claims figures and putting the USD Index to the period’s low in Thursday afternoon. Nevertheless, the Greenback’s measure managed to win back some ground on Friday, when wages and employment data offered a more positive picture of the US economy.

Volatility

Against the background of the rather turbulent second half of January, the Volatility Indexes showed quite weak activity in the past period. In terms of elevated volatility, the British pound became the most changeable currency among its peers, spending about 31% of the time above the historical level. The most tranquil, in turn, was the yen with only 11% of elevated volatility. Thus the portion of elevated volatility of the market was 20%. The Greenback held above the 1-point line for a quarter of the period and had the second highest volatility peak, losing only to Loonie, which managed to surge to 2.38 mark.

The movements of the Greenback’s volatility mostly repeated the previous week’s pattern. Thus the dollar had a very tranquil beginning of the period, hardly reaching the historical level. However, the last three trading days were quite volatile for the Greenback. The US employment and PMI data on Wednesday pushed the volatility index to 2.07 mark. On Thursday, the index jumped above the historical level in the early morning, at the time of Mario Draghi’s speech. The spike was not high and barely exceeded the 1.5 level. The most notable peak took place on Friday, right after the US nonfarm payrolls and unemployment rate releases, when the USD Volatility Index surged to the highest value of the period (2.18).

Currency Significance

The first week of February brought some improvement to correlations of the USD pairs. The average of the Greenback’s composite gained 0.2 points and came closer to the long-term value. However, it did not mean that the picture changed significantly, as the commodity currencies coupled with the yen continued to hold on leading positions. The US dollar’s composite with its European counterparts stayed behind while the pound was the only one which could compete with the pacific peers. The currency strongly reacted to the manufacturing PMI and the interest rate releases, which made its significance measure hold around the 0.5 level.

For the Greenback the period could be divided into two parts – before the Fed’s Dudley comments on interest rates and after that. The first two days mostly followed the pattern of the previous weeks, as the composite was slightly varying around the 0.2 level without evident reaction to any releases. Starting from Wednesday, when the USD fell against its counterparts, the currency’s significance measure rose to the 0.35 level and stayed mostly unchanged till Friday’s unemployment rate release, which unexpectedly shrank by 0.1% and managed the USD gauge to reach the week’s high of 0.64 points.

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