High volatility: what happened on Wednesday?

Yesterday was the day of volatility. We haven’t seen this type of volatility in the f market in weeks. In the last 24 hours, trading ranges expanded sharply leading to big moves in currencies.

US Session started with strong USD, weak EURO and GBP.  Although US Dollar ended the day higher versus the Japanese yen, it experienced significant losses against other major currencies. And in Asia session, we see that USD gained its losses against EURO, GBP and Gold. Having hit a low of 110.20 during the Asian trading session, USD/JPY quietly traded higher throughout the day but didn’t break 111 until FED PresidentsEvans and Kaplan made a hawkish shift. Evans, who voted against a rate hike at the last meeting, said he expects strong growth this year and next as the tax cut should add to business investment and jobs.

We see that central banks are also growing uncomfortable with the recent strength of their currencies, so we may finally see the dollar recover some of this month’s losses.

Other important even was the Bank of Canada’s rate decision.  It raised interest rates by 25bp in a move that Governor Poloz described as a “no-brainer.” At first, the Canadian dollar dropped because the policy statement expressed concerns about NAFTA and stressed the need for accommodation to keep inflation on target. The BoC also maintained its view that cautiousness is needed on future rate rises. However, the Canadian dollar recovered its losses when Governor Poloz and Deputy Governor Wilkins took to the stage an hour later. They expressed some concerns about wages and the risk of stalling the expansion by raising rates too quickly, but they also felt that tightening too slowly would risk an inflation buildup. Poloz said a rate hike would have validated what they’ve seen in the market and while he can’t say how much accommodation is needed, the economy is likely to warrant higher rates over time (according to the policy statement). The main takeaway from the day’s announcement is that the central bank felt the economy is strong enough to make a hike an easy decision and while it needs to be cautious moving forward, it’s optimistic – and that keeps another round of tightening in play.

Today, Chinese Chinese GDP data will be released, and it may have some effects on commodities and Australian Dollar.

Another important issue to underline is for the past week we have been warning about ECB jawboning and we’re seeing the first signs of discomfort from the central bank. On Wednesday morning, ECB Vice President Constancio joined ECB member Nowotny in suggesting that the strong and sudden moves in the currency are a concern. This may put EURUSD under bearish pressure.

GBPUSD hit 1.39400 but pulled back towards 1.38230  in Asia session. However, I still believe GBP has much stronger fundamentals than EURO.

Follow us to get the latest updates
 
 
Summary

LEAVE A REPLY

Please enter your comment!
Please enter your name here