Market Research

Market overview for May 6 – 10, 2019: US-China trade negotiations fuel volatility. The Pound's index reports its biggest weekly loss since November, the CHF Index posts positive weekly change after five periods of losses, the Kiwi measure's YTD decline extends below the -1.00% mark.

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Currency Indexes (CI)

The past week was marked by extreme opening moves, with the safe-havens and pacific gauges entering Asian trading on levels far away from the ones recorded on Friday. Aside from that, most of the observed indexes still remained bounded by the ±0.50% lines, but did display a notable pickup in activity, experiencing both sharp short-term moves and long directional changes. The Aussie's and the Yen's measures were the only ones to break out of the range in the positive area, while the Pound's index stood out by suffering major losses.

North America: USD, CAD

The US Dollar's index was among the three safe-haven measures to start the week with a boost, opening the Asian session 0.23 pp above the preceding Friday close. Afterwards, the USD Index proceeded by fluctuating around the baseline and ended up closing the period with a minor 0.17% loss. The result was fully outweighed by the initial surge, and the gauge actually managed to improve its MTD and YTD readings.

The turbulence at the Asian open was fuelled by the US President Trump's announcement, made on Sunday via Twitter, stating that the 10% tariffs applied to USD 20B of Chinese goods would be raised to 25% on May 10. The sudden escalation of tensions between the US and China had a major impact on the market, with the safe-havens and the Antipodeans zigzagging through the first hours of trading.

The Canadian Dollar's index opened the week with a marginal 0.08 pp loss, on par with its European peer, and finished the period with the worst result among the week's gainers.

Europe: EUR, GBP, CHF

The Euro's index spent the period in the positive area and managed to climb to the +0.50% line by the end of the week, becoming the second-best performer and posting its first notable weekly gain since April 12. The result pushed the measure's QTD change above +1.00%, letting it overcome the Greenback and the Pound and making it the second-best performer on the basis, and allowed the gauge to cut its YTD loss above the -2.00% mark.

Meanwhile, the Swiss Franc's index added 0.24 pp at Monday open, the second-highest among the reported jumps. However, the measure found no support for holding the level and slipped below the baseline, turning to recovery only in the second part of the week, when it moved largely in line with its EU and Japanese peers. Eventually, the measure managed to post a moderate 0.42% weekly gain, becoming the third-best performer and breaking its five-week-long streak of negative results.

After reporting major growth in the previous period, the Pound's index became the week's worst performer and posted its greatest weekly loss since November. Weighted by the news of no progress in the Brexit talks between the government and the opposition and calls for the PM May's resignation, the GBP Index spent the period in a downslide and ended up far below its peers. The result ate away the gains that the Pound's measure added to its YTD change in the previous period, and made the index yield the leadership to its Canadian peer.

Asia-Pacific: JPY, AUD, NZD

Unsurprisingly, the Yen's index was the main gainer on the spike in risk aversion. The measure opened the week 0.72 pp above the preceding Friday close and posted a 0.51% weekly growth, thus pushing its QTD change to the +2.00% mark and putting its YTD reading into the positive territory for the first time early January.

Meanwhile, the Antipodeans were the principal losers on the US-China headlines, but eventually saw their development over the week be guided by other factors.

The greatest initial loss was posted by the AUD Index, which opened the new week -0.65 pp below the preceding Friday close. Afterwards, however, the measure zigzagged to eventually turn north, and approached Tuesday's RBA event as the leader near the +0.50% line. The Australian policymaker proceeded to surprise the market by leaving its benchmark cash rate on hold instead of cutting, and the AUD Index surged by 0.57 pp, nearing the +1.00% line.

From there the Aussie's gauge started to lose ground, yielding the leading position to its Japanese peer on Wednesday and dropping below the +0.50% line at the time of President Trump's speech before his supporters in Florida, during which the US leader added more fuel to the trade worries by stating that China has "broken the deal". Later in the day the gauge bounced from the baseline as President Trump announced that he received a letter from the Chinese President Xi with "an excellent alternative to deal" and stated that he would soon speak with his colleague by phone.

Friday saw another round of zigzagging in both the AUD and the JPY Indexes, as the optimism bolstered by the US President's remarks was dimmed by reports that the new tariffs would still applied and that China would take "necessary countermeasures".

In the end, the AUD Index closed the period with a minor gain of 0.33%, which was fully erased by the start-of-the-week fall. The measure's QTD change slid further into the negative territory, making it the second-worst performer of the basis, while its YTD growth stood at its lowest level since the beginning of the year.

The New Zealand Dollar's index, in turn, turned south in Monday European session and ended up posting its second consecutive minor weekly loss. Combined with the 0.41 pp drop the NZD Index suffered on the week's open, the result pushed the measure's QTD reading to the -3.00% mark, while its YTD change fell below -1.00% for the first time since the beginning of the year.

Notably, the NZD Index spent most of the week moving sideways, and its proximity to the -0.50% line was mostly dictated by the 0.58 pp drop it recorded on Wednesday. The move was associated with the RBNZ's decision to cut its Official Cash Rate from 1.75% to 1.50%, which was largely expected by the experts but had a strong impact on the market, which seemed to gain optimist from the RBA's announcement the day prior. The drop was the week's sharpest 10-minute change, mirroring the 0.57 pp surge the AUD Index posted in response to its policymaker's decision.

Volatility

After four weeks of extremely low readings, the observed volatility medians finally edged up closer to the usual levels of around 0.030%. The highest values were posted by the Yen and the Aussie, while most of the other currencies reported median turbulence of 0.028% and the Euro and the Greenback lacked behind its peers with 0.025-0.026% results.

North America: USD, CAD

The most turbulent event in the Canadian economic calendar proved to be the release of labour data on Friday, which showed the unemployment rate unexpectedly fall to 5.7% and employment numbers improve more than forecast. The CAD Index added 0.42 pp on the news, and the Loonie's aggregate volatility jump to 0.107%. Above-average readings were reported by the currency's safe-haven pairs – CAD/CHF, CAD/JPY, and USD/CAD, with the latter's turbulence gaining additional fuel from the Greenback's reaction to worse-than-expected US inflation data.

Asia-Pacific: JPY, AUD, NZD

The week's two highest volatility peaks stood on par with each other, were fuelled by 10-minutes changes of similar magnitude and reported the reactions to analogous events. The first one, reaching 0.138%, was formed by the AUD Index's 0.57 pp spike in response to the RBA unexpectedly leaving its interest rate on hold, while the second peak marked the NZD Index's 0.58 pp tumble at the New Zealand policymaker's decision to cut. In both cases the greatest readings were reported by the pairs with the Yen.

Currency Pair Correlations

Most of the correlations selected for the period continued to be related to the Pound's receding influence.

GBP/JPY correlations with EUR/GBP and GBP/USD showed major weakening compared to both medium- and long-term levels, with the former posting mostly insignificant values and thus indicating an absence of a reliable relationship. GBP/CHF correlations with GBP/USD and EUR/GBP remained roughly on the monthly levels, which were subdued compared to the half-yearly readings.

Meanwhile, correlations between GBP/JPY and USD/JPY shifted to the strongest observed levels, with their weekly median standing well above the 0.50-point significance threshold.

Interesting patterns were observed among correlations between the pairs that hold no common currencies. Thus AUS/USD correlations with GBP/JPY and EUR/JPY, and USD/CAD correlations with GBP/JPY and EUR/JPY all pointed at a sharp strengthening in the bonds between the instruments, with most of their readings standing above the long-term medians.

Extreme strengthening was also observed in correlations between EUR/JPY and USD/JPY.