Market overview for October 22 – October 26 2018: Volatility remains on solid monthly levels. Equity market drives the risk-sensitive currencies, the Pound's index posts its greatest weekly loss since the beginning of the year. EUR/USD and GBP/USD correlations with NZD/USD and AUD/USD remain subdued.
[/ANNOUNCE] {ATTACHMENT}Currency Indexes (CI)
As the risk-sensitive indexes were governed by the equity-market-related sentiment, and the European measures were weighted by the political uncertainties, the past week saw the observed measures be affected by both persistent developments and sharp changes. The moves were fairly balanced on both sides of the baseline, with the losers and the gainers being largely restricted by the ±1.50% lines.
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North America: USD, CAD
The US Dollar's index posted a solid 0.57% weekly gain, thus fully paring the loss it sustained in October's first period. The result, coupled with the Pound's measure's tumble, allowed the Greenback's gauge to claim the second-best position on the MTD basis.
The USD Index spent most of the period steadily climbing up, with the main drivers behind its uptrend being the decline in the equity market, which spilled into an overall risk-off sentiment, and the unattractiveness of the Euro and the Pound that was fuelled by political uncertainties in the EU. The tables turned in Friday afternoon, when the measure went sharply down against the background of a fall in the US yields. The USD Index fell from its week's high of +1.11% at the start of the New York session to +0.50% in four and a half hours, with the downslide overshadowing the release of the better-than-expected Q3 GDP data.
The Canadian Dollar's index finished the period virtually on par with its US counterpart, reporting a weekly growth of 0.58%. After two consecutive losses, the gain did little for the measure's MTD reading, which remained strongly red, but did put its YTD change back into the positive territory. Meanwhile, the index's 4W change, calculated relative to strong end-of-September levels, fell to its worst level since June.
The only important entries in the past week's Canadian economic calendar were the BoC rate announcement and the following press conference, which took place in Wednesday afternoon. Ahead of the events, the CAD Index swayed between the +0.25% and +0.50% lines, opening the week near the level it dropped to with the disappointing CPI and retail sales release on previous Friday, and climbing up over Monday's trading. On Wednesday, as the BoC delivered the expected hike and dropped the word "gradual" from the description of the further rate policy, the CAD Index added 0.70 pp in forty minutes, crossing above the +1.20% line and leaving its peers far behind. The measure lost some of the gains in the next half an hour, with a sharp fall of 0.21 pp taking place in the beginning of the press conference, after Senior Deputy Governor Wilkins explained that the change of wording that was largely seen as hawkish was meant only to indicate that the policymaker was not following a "preordained, mechanical policy path", and that the hikes could actually be delivered a bit slower rather than faster, depending on the economic conditions. Later, however, Governor Poloz delivered some positive remarks, stating that the economy no longer needed stimulus and that the rate would need to rise to the neutral level of 2.5-3.5%. The CAD Index surged up, adding a total of 0.49 pp in 50 minutes and reaching its period's absolute high of +1.54%. The momentum, however, did not hold, and the measure fell to the +1.00% line by the New York close, and proceeded to slide down till the end of the week.
{ATTACHMENT}Europe: EUR, GBP, CHF
The European safe-haven Franc's measure remained moderately positive throughout the period, mostly fluctuating between the +0.25% and +0.50% lines. It ended up finishing the week near its Canadian and US peers with a 0.46% gain, it first positive result after four weeks of losses.
The Euro's index posted a notable 0.57% loss, its third consecutive negative result and the greatest weekly decline since the beginning of August. With that the measure reported the third-greatest MTD and second-greatest 4W falls.
Throughout the week, the EUR Index was pressured by the Greenback's strength and the turmoil over Italy's budget. On Tuesday, the EU officially rejected the draft and asked the country to submit a revised plan in three weeks, while the Italian officials continued to insist that the budget would not be changed, and only budged by framing the 2.4% of GDP as the ceiling for 2019 deficit. With that the EUR Index opened Tuesday's European session on a weak footing, and went into a downslide as the string of PMI numbers came in below expectations. The measure slid from the -0.25% line below the -0.50% mark, and spent the rest of the period fluctuating between the two levels. Notably, on Thursday, the index almost broke out that range at the start of the ECB press conference. After largely ignoring the rate announcement and the accompanying statement, the EUR Index added 0.12 pp in the first half an hour of the conference, supported by ECB President Draghi's generally optimistic comments stating that the policymaker expected the underlying inflation to pick up towards the end of the year, and that the recently observed underperformance represented a weakening in the momentum rather than a downturn. Later, however, answering the questions about Italy, the ECB President lost the reassuring rhetoric and admitted that the EMU was fragile. The EUR Index lost 0.30 pp, falling back to the -0.75% line, which served at its support level in the second part of the period.
The Pound's measure was the period's worst performer, posting its third negative change in a row and the greatest weekly loss since the beginning of the year. The result erased the strong gain the measure reported on October 5, pushing its MTD and YTD readings below zero. The index's 4W change also fell into the negative territory, for the first time after seven weeks of positive results.
The GBP Index was, of course, mostly influenced by the Brexit headlines. On Monday, the measure lost 0.38 pp, falling rapidly to the -0.50% line after it was reported that the Tory Eurosceptics' proposition to make the EU's Northern Ireland backstop illegal found new support in the Democratic Unionist Party. The GBP Index remained glued to the level throughout Tuesday, with the exception of a brief upsurge at the back of the reports that the EU would offer PM May a UK-wide customs union instead of the Irish backstop. The news pushed the Pound's measure up by 0.32 pp, but the moment was lost right away, and the index tumbled back to the -0.50% line in four hours. For the rest of the period, the GBP Index was sliding down, responding to the moves of its peers, and eventually settled 0.60 pp below its closest counterpart.
Asia-Pacific: JPY, AUD, NZD
The Yen's index posted the period's largest gain, putting its MTD change to its highest level since late February and pushing its YTD reading back above the +5.00% mark.
The News Zealand Dollar's measure, in turn, reported the second-greatest weekly loss, undermining the efforts of the two previous periods and pushing its MTD change back into the negative territory.
After spending two periods in the positive territory, the NZD Index opened the week 0.28 pp above the previous Friday's close, but was immediately hit by the risk-off mood. As a result, the measure spent most of the period in a downtrend, competing for the main loser's position with the Pound's index and only diverging from its UK peer's path in Thursday and Friday.
The Australian Dollar's index once again proved to be less sensitive to the downward pressure than its New Zealand counterpart. The AUD Index mirrored the Kiwi measure's movements, but did not show a clear downtrend, thus spending the period fluctuating between the -0.50% and the +0.25% lines. With the Greenback's measure's downslide on Friday, the Aussie's gauge finished the period near the upper limit of its range, thus reporting its third positive result in a row. Nevertheless, the measure's MTD change remained negative, with the moderate gains of the three past periods failing to outweigh the major loss recorded on October 5.
Volatility
{ATTACHMENT}In general, volatility observed in the past week remained in line with the monthly readings. As the currency indexes were largely governed by the market's risk sentiment, median volatility levels reported by the commodity-related currencies, the Yen, and the US Dollar stood above the four-week values. The Pound, in turn, was the only currency to show a decline in median volatility as its turbulence measure edged down from the previous period's elevated reading.
{ATTACHMENT}North America: USD, CAD
{ATTACHMENT}Wednesday's BoC events were only the most influential ones for the Canadian Dollar, but were also the only ones to provoke volatility peaks that reached above the 0.100% mark. The rate hike announcement and the release of the rate statement caused the CAD Index to add 0.50 pp in the first 10 minutes after the event, thus fuelling the week's sharpest 10-minute jump and putting the Loonie's aggregate turbulence measure at 0.123%. The following drops and jumps of the index caused the volatility gauge to fluctuate around the 0.109% level for an hour, with the final 0.16 pp jump setting the measure to 0.110%.
Both events saw the sharpest reactions come from CAD/JPY and USD/CAD. The initial jump was also well pronounced in NZD/CAD and AUD/CAD, while the latter moves had a greater effect on CAD/CHF and EUR/CAD.
Europe: EUR, GBP, CHF
{ATTACHMENT}The most volatility-provoking of the past period's Brexit-related reports the one on a possible UK-wide customs union. The GBP Index's first reaction to the news was a 0.28 pp jump, which put its aggregate volatility at 0.078%. The above-average individual values were reported by GBP/JPY, GBP/CAD, and GBP/NZD.
The Euro's index also showed one prominent volatility peak. It was formed amid Wednesday's PMI data releases and the EUR Index's tumble, and while the single currency's aggregate turbulence measure rose only to 0.043%, its was the currency's only volatility peak that stood above those of its peers.
Asia-Pacific: JPY, AUD, NZD
{ATTACHMENT}The Australian Dollar fuelled the week's first prominent volatility peak as the AUD Index started the Tokyo session with a 0.18 pp fall, getting additional pressure from the Wentworth by-election that took place on October 20. As preliminary results pointed at the independent candidate's victory, the AUD Index answered the Yen's and the Greenback's measures' strengthening with a much sharper decline than its New Zealand peer, thus pushing its volatility aggregate to 0.049%.
Another notable Aussie's volatility peak was formed during Friday's downslide, when the AUD Index lost 0.19 pp in the week's sharpest 10-minute fall.
Currency Pair Correlations
{ATTACHMENT}The past week saw very little changes in the observed significant correlations, with four of the ten selected combinations showing virtually no discrepancies between the weekly and the long-term medians.
The greatest change was observed in the correlations between GBP/JPY and USD/JPY, whose weekly readings extended the strengthening pattern seen in the monthly distribution and shifted almost completely above the 0.50-point significance threshold.
Extensions of medium-term patterns were also observed in EUR/USD correlations with NZD/USD and AUD/USD, whose weekly medians dropped further below the half yearly readings. GBP/USD weekly correlations with the Greenback's Antipodean pairs, in turn, remained in line with the monthly level, but were also well below the long-term norm.
A similar pattern was observed in correlations between EUR/USD and GBP/USD, whose weekly distribution matched the monthly one, but was slightly lowered compared to the 26-week values.