Market overview for September 3 - September 7 2018: Volatility edges up from the subdued levels of the two previous periods. The GBP Index is pushed around by the Brexit headlines, commodity-related measures post losses, safe-havens rise above the +0.50% line in the end of the week. Most of the correlations indicate weakening of the bonds from elevated monthly levels to or even below more moderate half-yearly readings.
[/ANNOUNCE] {ATTACHMENT}Currency Indexes (CI)
The movements of the observed currency indexes were notably less directed than in the previous period, but the sharp changes still managed to take all of the measures beyond the ±0.50% range.
{ATTACHMENT}North America: USD, CAD
The first week of September saw the US Dollar's measure post a solid gain after two weeks of losses and a near-zero change seen in the previous period. Nevertheless, the gauge also reported its first negative 4W change since early April, as the past week's results failed to overcome the risk-aversion-fuelled increase observed in the beginning of August.
The USD Index spent most of the period in the positive territory, largely riding the wave of risk-off sentiment and the decline in the emerging markets. The principal US-related macroeconomic event proved to be Friday's jobs report release, with average hourly earnings coming in well above expectations, non-farm employment numbers beating forecasts, and unemployment rate remaining unchanged. The USD Index added 0.23 pp in its sharpest 10-minute jump and gained the total of 0.35 pp, surging away from the baseline and positioning itself to close the week in the appreciation area.
Meanwhile, as the NAFTA deal deadline set by President Trump passed without any agreements reached by the US and Canada, the Canadian Dollar's index slipped below the baseline on Monday and remained in the negative area for the rest of the week. As a result, the measure posted its third consecutive weekly loss, deepening its 4W decline and losing another position on the QTD basis to stand at the third place after the Swiss Franc's gauge and the US Dollar's index.
The CAD Index was mostly influenced by the NAFTA uncertainty and its US counterpart's strength, but also made two major news-related moves. On Wednesday, the measure lost 0.24 pp and landed on the -0.80% line, well below its peers, after the BoC rate statement downplayed the role of above-target inflation, noting that the number was expected to return to 2% in early 2019, and restated its concerns over the trade tensions. Next day, the CAD Index reached the week's absolute low of -1.14%, but was sent skyrocketing by the BoC Senior Deputy Governor Wilkins' comment revealing that the policy maker debated "whether the gradual approach to raising rates <…> remained appropriate", and thus fuelling hopes for faster rate hike pace. The CAD Index added 0.39 pp in the week's second-largest 10-minute jump, which allowed it to overcome its Australian and New Zealand peers at the end of the period.
{ATTACHMENT}Europe: EUR, GBP, CHF
With Brexit headlines continuing to evoke sharp reactions from the market, the British Pound remained the most unstable of the observed European currencies. The GBP Index spent roughly equal amounts of time on both sides of the baseline, but closed the period in the positive area, posting its third consecutive weekly gain. The result, however, had little effect on the long-term readings, with the 4W change being the only one to show a positive value.
The weekend saw both EU's chief Brexit negotiator Barnier and UK Foreign Minister Johnson criticise PM May's Chequers plan, and the GBP Index started the week by sliding below the baseline. The measure was struggling to break above the level for the first half of the period, until it was spurred by the reports that Germany and the UK decided to push back reaching an agreement on the trade relationship and instead focus on immediate-term transition deal. The GBP Index added 0.83 pp in a staggering 10-minute jump and skyrocketed above all of its peers. The reports were rebutted two hours later, with the spokesman for the German government stating that the country's stance on Brexit did not change, but the Pound's measure lost only a little more than a half of its earlier gains, thus remaining in the positive area. On Friday, another Brexit headline, this time citing the EU's readiness to discuss new backstops to the Irish border, gave the GBP Index the week's final push, allowing it to finish the period among the top performers.
Meanwhile, the Franc's measure lost the previous period's momentum and spent most of the week near the baseline, only turning north in the last two trading days, as the commodity-related measures came under intense pressure. The CHF Index managed to climb up 0.60 pp, posting its third solid weekly gain in a row.
The Euro's index, in turn, did not experience any major changes in behaviour and spent the period fluctuating between the baseline and the +0.60% line. The measure ended up posting a near-zero positive weekly change, allowing its QTD reading to settle a bit more firmly in the positive area.
Asia-Pacific: JPY, AUD, NZD
The Asia-Pacific indexes were largely governed by the market's sentiment. As a result, the Yen's measure posted the week's second-largest weekly gain, while the NZ Dollar's index posted its second consecutive greater-than-1.00% loss, and its Australian peer reported the third weekly decline in a row. Notably, the JPY Index's 4W change dropped below zero, while the 26W reading returned to the positive area.
The AUD Index was the only Asia-Pacific gauge to show prominent reactions to macroeconomic data. On Monday, the measure's decline was accelerated by the loss of 0.15 pp after the release of worse-than-expected retail sales numbers. Tuesday and Wednesday, in turn, saw some fuel being added to the index's attempts to hold above the baseline. The first jump took the measure 0.46 pp up as the RBA statement acknowledged the decline in the Aussie's value, moving away from the warnings about the negative effects of the national currency's strength. The second surge held 0.31 pp and marked the release of better-than-expected GDP growth. In both cases, however, the momentum was soon lost, and on Thursday the AUD Index drifted to the baseline. On Friday further pressure came from President Trump's comments stating that not only would the tariffs on USD 200B worth of Chinese imports "take place very soon", but the US was preparing additional tariffs on USD 267B worth of goods. The AUD Index lost 0.42 pp and neared the NZD Index, which spent the whole period below the baseline.
Volatility
{ATTACHMENT}The market's turbulence edged up from the subdued levels it held on in the two previous periods. The Euro, the Franc, the Loonie, and the US Dollar still posted below-0.030% volatility medians, but the Pound and the Antipodeans reported solid median turbulence levels.
{ATTACHMENT}North America: USD, CAD
{ATTACHMENT}Carolyn Wilkins' speech proved to be the only turbulence inducing event for the North American currencies. The CAD Index's surge caused the currency's aggregate volatility to jump to 0.096%, with the readings above 0.100% mark being reported by CAD/JPY, GBP/CAD, and USD/CAD.
Europe: EUR, GBP, CHF
{ATTACHMENT}All of the prominent volatility peaks formed by the European currencies were fuelled by the Brexit headlines. The main peaks, which also saw volatility reach the week's absolute high levels, accompanied the GBP Index's surge and tumble with Wednesday's reports on Germany's position on Brexit. The moves saw the Pound's aggregate turbulence measure jump to 0.202% and 0.185%, respectively, with the sharpest reactions on both occasions coming from GBP/JPY, GBP/USD, and GBP/CAD.
Less dramatic news, and with that more moderate responses, came on Tuesday and on Friday. Interestingly, both events concerned the same topic – statements about the EU being ready to make changes to the backstop solution, – but came from different sources, and thus evoked different reactions. The first one to put the idea forward was Danuta Hubner, the chair of the EP constitutional affairs committee, and her comment sent the GBP Index 0.19 pp up and prompted the currency's aggregate volatility to reach a modest level of 0.060%. On Friday, the same sentiment was voiced by Michel Barnier, and the GBP Index added 0.43 pp, with the turbulence measure jumping to 0.083%.
Asia-Pacific: JPY, AUD, NZD
{ATTACHMENT}Interestingly, the economic calendar events that moved the AUD Index formed volatility peaks with different component distributions. Thus the dip in response to the retail sales release was marked by fairly uniform reactions of the Aussie's pair, with AUD/NZD, as usual, being the only instrument to post muted volatility. Meanwhile, the post-RBA surge saw above-average volatility being posted by the safe-haven pairs – AUD/JPY, AUD/CHF, and AUD/USD, and the GDP-fuelled spike was most prominent in AUD/JPY, AUD/USD, and AUD/NZD.
Friday's US-China tariffs news affected both the Aussie and the Yen, with the AUD Index having its sharpest reaction one candle ahead of its Japanese peer. Thus both aggregates neared the 0.090% mark, with AUD/JPY individual reading going from 0.124% to 0.134%.
Currency Pair Correlations
{ATTACHMENT}Most of the correlation combinations selected for the period indicated weakening of the bonds from elevated monthly levels to or even below more moderate half-yearly readings.
Such pattern was observed in GBP/USD correlations with AUD/USD, NZD/USD, and EUR/USD, whose medians fell below both 4- and 26-week medians. Correlation between EUR/USD and GBP/JPY also shifted down from elevated medium-term levels, but their weekly distribution stood in line with the half-yearly levels.
Similarly, EUR/USD correlations with AUD/USD and NZD/USD eased from the extreme monthly levels back to the long-term norms.
Meanwhile, GBP/CHF correlations with GBP/USD and GBP/JPY edged further into the elevated territory.