Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

FX Volatility Picks Up, But Stories Remain The Same

Published 26/10/2016, 08:19 am
Updated 09/07/2023, 08:31 pm

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

After days of consolidation we have finally seen a pickup in volatility in the forex market. Sterling dropped to a 2-week low before reversing sharply to end the day with mild losses. USD/JPY jumped to a 2-month high, USD/CHF rose to a 7-month high and EUR/USD found its way back to 1.09 after dropping to a 7-month low. The U.S. dollar held steady or traded lower against most of the major currencies as U.S. rates refused to rise. A surprisingly large decline in consumer confidence put pressure on the dollar even as S&P CaseShiller reported an uptick in house prices, the Richmond Fed reported an improvement in manufacturing conditions and the IBD/TIPP economic optimism index ticked higher. While Treasury yields dropped slightly, Fed-fund futures increased with the market now pricing in a 74% chance of a rate hike in December, up from Monday’s 70% chance. Wednesday’s trade balance, Markit PMI services and new-home sales reports should have a limited impact on the dollar as investors watch yields and the reversals in euro and sterling.

The big story Tuesday was the sharp intraday reversals in European currencies. The wildest swings were seen in GBP/USD whose range expanded to 160 pips, nearly double its average daily range the four days prior.
With no U.K. economic reports released, the focus was on Bank of England Governor Mark Carney’s comments. Sterling crashed in the lead up to his speech but when he said “monetary policy can’t do everything,” and that they are “not indifferent to the moves in the pound” along with there are “limits to MPC willingness to look through CPI overshoot,” sterling soared. Cable traders needed an excuse to cover their short positions and they found just that in Carney’s comments. However we don’t think it changes anything. Brexit is still the big story and a hard Brexit would certainly force the central bank to put growth ahead of inflation. But right now, it seems that Prime Minister May is willing to give Parliament a say, which means that Brexit will come slowly. Sterling is still a sell but we may see more short covering that takes GBP/USD to 1.23 before sellers jump back in again.

The euro traded as low as 1.0850 Tuesday and as high as 1.0905. While this range is extremely narrow, it is encouraging that the pair ended the day well above its 7-month low.
Tuesday was also the first positive day for EUR/USD in more than a week. German business confidence improved in October, which is not surprising given the uptick in manufacturing and services activity. However it was the fall in the U.S. dollar and the comments from ECB President Draghi that took EUR/USD higher. Investors were relieved that Draghi did not press the idea of more stimulus. Instead he said monetary policy is working as expected, warning that low rates are not costless and indicated they are committed to preserving monetary stimulus. Now, keeping monetary policy easy is not the same as having plans to increase bond purchases or lower interest rates. We still think the ECB will ease but this may be enough to trigger a much-needed relief rally in the currency -- especially after recent improvements in Eurozone data.

The Australian, New Zealand and Canadian dollars ended the day higher against the greenback. The Australian dollar was a big gainer thanks to rising gold prices.
No economic reports were released from the commodity-producing countries but CPI numbers were expected from Australia Tuesday evening. Inflation numbers are always important but in the case of Australia, they will play a big role in confirming to the market whether the neutral bias of the RBA and recent gains in AUD are justified. If CPI rises, even slightly, we should see broad-based gains in AUD. But if they slow, particularly on a year-over-year basis, we could see AUD/USD fall back to 76 cents. Meanwhile, USD/CAD is holding onto its recent gains despite the drop in oil prices. In a meeting with Russian Energy Minister, Alexander Novak, Venezuela’s oil minister Eulogio Del Pino proposed a production cut of 400,000-500,000 barrels per day. At this point Russia has still made no definitive announcement regarding its oil plans. Russia appears to be willing to participate in an oil freeze but has yet to commit to a production cut. WTI crude fell below $50 per barrel on more verbal whipsawing among oil producers.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.