USD: Currency Index & Volatility

Relative Currency Strength

USD index was one of best performing currency index last week and was surpassed only by the GBP index. It showed clear bullish bias from the beginning of the period. Better than expected Core PPI and Manufacturing Index data from the US caused USD index end the Wednesday 0.48% above the base (opening) value. Index continued to inch up higher on Thursday which was heavy with US data. Most of the numbers came out as expected which directed some of the capital flows to other currencies causing USD index to end the day where it started—0.45% above the base value. Friday’s data releases helped USD index to climb further up. It gained 0.37% during the day and ended it 0.82% above the base value.

Monday was a bank holiday in the US due to which, as we can see from the graph, most of the indices showed very little change during the day (kiwi index was effected by the New Zealand’s CPI data). Tuesday showed very few data releases at all, none from the US. However, as most of the numbers came out worse than expected, it must have boosted the trust in USD. However, Canadian data later in the day dragged USD index down. It ended the period 0.51% above the base value.

USD posted gains against most of it’s major counterparts which varied from 0.11% and 0.16% against yen and loonie respectively, till 1.2% against the aussie. The only, 0.31%, loss is against GBP which benefited heavily from Retail Sales data on Friday.

Volatility

Due to the Bank Holidays in the US on Monday we saw rather little action in the markets in the last week. It is very well illustrated by the fact that market (Dukascopy Bank Volatility Index) and all of the currency pairs demonstrated elevated volatility in less than 30% of the time. In addition to this, average volatility of the market and all of the individual currency pairs was noticeably below the long term values.

We saw few peaks in trading activities on Wednesday when Europe’s and US data was coming out, but volatility remained below the 1.5 times the normal levels. Highlight of the week was on Thursday during the release of the US Manufacturing Index.

It caused EUR/USD to change hands 2.3 times more intensively than the usual. Market volatility at the same time was 1.7 times higher than the usual, also weekly high. UK’s Retail Sales boosted trading in the market on Friday, but had very little effect on the EUR/USD. US data in the rest of the day, however, kept the pair trading 1.5 times, or close to it, more intensively than usual. Due to the mentioned Bank Holidays in the US there is almost no activity on Monday. Tuesday’s volatility is attributable to a very few events—release of the ZEW Economic Sentiment in the first part of the day and Canadian Manufacturing Sales and Wholesale Sales later in the second part of the day. Both boosted EUR/USD volatility but no more than to 1.4 times the normal value.

Currency Significance

Significance of the USD in the markets, expressed as the average correlation between the various USD crosses, showed an overall decrease in the period. It opened at 0.35 and closed at 0.28. In our opinion it seems reasonable to assume that this happened due to the Bank Holidays on Monday and the fact that quite a few US data releases gave largely as expected results which did not facilitate retail trader’s interest in USD. First boost in the gauge, surprisingly, is seen on Wednesday when Australian New Motor Vehicle Sales data came out. Following Eurozone and US data releases dragged it a bit lower. However, it remained around 0.45 level till Friday.

Unexpectedly, it started to trail lower right after midnight. Eurozone data caused the gauge to trail till 0.2. US data released drew the attention back to the US, but overall trend of the indicator remained the same. It hit period low of 0.12 on Monday evening. On Tuesday, however, we saw a substantial increase in the gauge as ZEW data provided initial boost and Canadian data lifted it till 0.3, around where it remained until the end of the period.

Looking at correlations between USD/EUR and other USD crosses we can see that noticeable differences are seen on Asian-Pacific currencies and loonie. In our opinion it is due to the fact that, home regions of these currencies showed significant data releases on Monday, during the US bank holidays.