Dollar Suffers Biggest Drop in Four Weeks on Quiet Day?
The 20-day (1-month) rolling correlation between the US dollar and aggregate currency market volatility index currently stands at 0.93. Considering implied (expected) volatility is essentially a measure of risk or fear, the greenback is currently locked in to sentiment trends. That means that any financial tremor will give the benchmark currency a sudden boost; but by the same token, a pullback in volatility translates into a diminished appetite for the dollar. Naturally, with the US market’s closed for the Memorial holiday, the activity levels would drop and the currency in turn would take a hit.
It is interesting to note that while US equity markets (buoyed by the expectation that the Fed lies in wait for any sign of investor losses to swoop in with another stimulus injection) consolidated throughout last week, the greenback extended its advance to a four day advance. That outperformance ended Monday, however, as the Dow Jones FXCM Dollar Index dropped 0.38 percent – the biggest one-day decline since the exhaustion move on April 27. We were expecting US speculators to be absent through the opening 24 hours, but the damper on liquidity this one country’s absence would have on other regions was a something of a surprise. Volume on the European benchmark DAX (German) and FTSE 100 (UK) indexes reflected the weakest levels of trading volume we have seen all year. Asian market turnover was the lowest seen in over a month for many of the key composites. With the greenback already overstepping its bounds on its safe haven position and the liquidity drain doing little to incite risk-adverse volatility, a correction found a strong fundamental pull.
The real tone of the week will be reflected, though, in how the currency performance as participation levels top off. In the early hours of the Asian trading session, we have seen regional shares drop while US equity futures slide on the open. The immediate shift to risk aversion comes without a definable catalyst to underlying sentiment – but that will likely be the tempo for the week. For risk-based fundamental sparks this week, there are few scheduled events or releases that look to hold the necessary impetus to single-handedly unite all the capital and credit markets to the same bearing. We can wait for an off-chance that the NFPs can stir unrest for a pre-existing lean or keep a watchful eye on the headlines.
It is interesting to note that while US equity markets (buoyed by the expectation that the Fed lies in wait for any sign of investor losses to swoop in with another stimulus injection) consolidated throughout last week, the greenback extended its advance to a four day advance. That outperformance ended Monday, however, as the Dow Jones FXCM Dollar Index dropped 0.38 percent – the biggest one-day decline since the exhaustion move on April 27. We were expecting US speculators to be absent through the opening 24 hours, but the damper on liquidity this one country’s absence would have on other regions was a something of a surprise. Volume on the European benchmark DAX (German) and FTSE 100 (UK) indexes reflected the weakest levels of trading volume we have seen all year. Asian market turnover was the lowest seen in over a month for many of the key composites. With the greenback already overstepping its bounds on its safe haven position and the liquidity drain doing little to incite risk-adverse volatility, a correction found a strong fundamental pull.
The real tone of the week will be reflected, though, in how the currency performance as participation levels top off. In the early hours of the Asian trading session, we have seen regional shares drop while US equity futures slide on the open. The immediate shift to risk aversion comes without a definable catalyst to underlying sentiment – but that will likely be the tempo for the week. For risk-based fundamental sparks this week, there are few scheduled events or releases that look to hold the necessary impetus to single-handedly unite all the capital and credit markets to the same bearing. We can wait for an off-chance that the NFPs can stir unrest for a pre-existing lean or keep a watchful eye on the headlines.
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