USD: Currency Index & Volatility

Relative Currency Strength

Tumble with Mario Draghi’s comments on the urgency of the inflation raise and the ECB’s readiness to widen its asset purchase plan.

In the course of the period, the USD Index was little affected by the US data. The FOMC minutes, which were released on Wednesday and highlighted the Fed’s concerns about declining inflation expectations, caused the week’s sharpest fall of the Greenback, but as it managed to recover within half an hour, the event barely registered in the Currency Index. The most pronounced reactions were caused by the disappointing German and Eurozone PMI estimates and Mario Draghi’s speech, which undermined the Euro and won the USD Index 0.2% and 0.3% spikes, respectively.

The USD Index was more confident compared to the previous period, and as its track turned from a flat line to an uptrend, it finished the week with the second highest weekly growth. 0.2 points behind it was the pound’s gauge that surged above 100.5 point level on Wednesday and managed to hold above it for the rest of the period. The best performer, in turn, was the CAD Index, which skyrocketed on Friday, fueled by the stronger than expected Canadian inflation numbers, and posted the highest weekly growth since the end of September. The last day of the period was the most eventful one as it also saw the Aussie and the Kiwi jump in response to the PBOC rate cut, and the Euro.

Volatility

The market and almost all observed currencies started the week with elevated volatility. However, the Japanese GDP release mostly affected the yen’s turbulence, and other indexes stayed below the 1.2 points level. The first noticeable peak of the USD volatility occurred on Wednesday. The index jumped to 1.67 points right after the FOMC minutes. Thursday was marked by the plenty of US news, including CPI, jobless claims, and manufacturing PMI, and the USD index formed two peaks, jumping to 1.43 and 1.78 points. The highest spike of all volatility indexes occurred on Friday, after the PBOC interest rate decision. It had an especially strong impact on the Pacific currencies, while the USD turbulence reached only a 2.12 points level, far the below the market’s peak.

The overall level of the USD volatility has fallen palpably at the end of October and still has not returned to higher levels. Thus, for the second week in a row, the USD Volatility Index managed to exceed the 1-point mark in only 26% of time. The strength of the volatility surges was also rather moderate, and the maximum peek was only 2.12 points high. In turn, the market volatility has slightly increased compared with the previous week and caught up with the dollar’s gauge, while its maximum peek exceeded that of the Greenback.

Currency Significance

The correlations grew on Wednesday, when US construction data was released. The following day was not marked with any noticeable changes of the gauge and in spite of the positive news on CPI and declining jobless claims the gauge did not overpass 0.55 level of the previous day. The peak on Friday was associated with the US dollar’s appreciation against the background of the Euro’s negative reaction on President Draghi’s speech. The subsequent decrease of the USD correlations pointed out the weakening driving power of the dollar, after the announcement of the Chinese interest rate cut and the release of surprisingly high Canadian CPI.

The average correlation of the observed USD pairs, which measures significance of the currency, was varying in a wide range of 0.25 – 0.69 points. As can be seen from the violin graph, the correlations during the week were mostly on or below the average correlations of a wider window.

The composite started the period on a relatively high 0.65 points level, but in absence of influential news on the US economy and against the background of the RBA Governor’s speech on Australian economy and UK CPI release, the Greenback lost its significance and the gauge fell to the 0.25 points – the week’s low.