Dukascopy Market and Economic Research

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Highlights of the latest Market Research on EUR:



Over the past week European currencies were the ones to come to the top, outperforming the rest of their counterparts. While the Swedish Krona appreciated the most in the market—2.57%, gains of the Euro were less pronounced, amounting to 0.49%. However, the rally of the 17-nation currency was not gradual, but largely attributable to the events on Dec 18, when the progress of fiscal talks in the United States supported increased exposure towards high-beta currencies. Further development of the issue in the U.S., on the other hand, especially an eventual failure of politicians to come to a consensus, muted the preceding positive effect.



All of the other news were generally incapable of altering valuation of the Euro, which remains immune to negative readings on the bloc’s economy, though it was hard to trace during the recent week given a limited amount of such releases since Dec 17.
Nonetheless, the same could be ascribed to supposedly bullish for the currency news. The Euro did not benefit from expansion of the monetary easing programme by the Bank of Japan. It also remained unresponsive to improving business climate in Germany. Accordingly, this leaves us with only one topic to follow, which for now completely defines direction of the single European currency.

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Highlights of the latest Market Research on USD:



The U.S. Dollar has taken the opposite direction to its performance observed over the last half of a year by appreciating on average 0.73%, while the currency index was more than 2.9% lower 130 trading days ago. The major role in the outcome of the recent five days occupied daunting proximity of the “fiscal cliff” that has dented some of the riskier currencies, namely the New Zealand Dollar and its Australian counterpart, allowing the greenback to benefit at their expense. The Sterling also gave in to weakness, however, neither the Euro nor the Canadian Dollar proved to be susceptible to protracted and in many ways unsuccessful negotiations.



The only currency that was more bullish than the buck was the Swedish Krona, demand for which sharply rose amid Riksbank’s plans not to flood financial system with excess liquidity and halt interest rate cuts. Accordingly, USD/SEK plunged 0.8% since Dec 19, though there was not as much progress in the currency pair after Dec 20.
Going forward, there is hardly any chance U.S. politicians will disagree until the very end and fail to maintain the current stimulus of economic activity. Therefore the outlook on the Dollar is from neutral to negative, as eventual resolution of the issue should calm the markets, and as a result induce investors to take riskier bets, which in turn will weigh on the Dollar.

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Highlights of the latest Market Research on CHF:



Being that, despite EUR/CHF currently hovering some distance above the floor of 1.20, the correlation coefficient between the average values of EUR and CHF is next to 1, the talk in this issue will mainly revolve around the single European currency.
Behaviour of the currency indices over the last five trading days refutes binary understanding of market sentiment, since a common belief of safe havens outperforming high-beta currencies amid risk aversion and vice versa amid risk taking mood of investors did not hold. In particular the fact that both the Euro and U.S. Dollar appreciated gave rise to such a conclusion.



However, the denial is not complete, as such a phenomenon is only observed during a short period of time and it may be only a temporary deviation from the normality, a case when the values of these two currencies move in the opposite directions.
Such a strong change introduced into the context of the market is more likely to be explained by events, against the background of which two assets with much different risk profiles and with historically contrarian reactions to new information gained 0.95% and 0.77%, respectively. This is how a combined effect of the “fiscal cliff” on the one side and of a new government in Japan on the other impacted the foreign exchange, while the world approached a new year.

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Highlights of the latest Market Research on EUR:



Against all odds the Euro keeps on rising in value, appreciating 0.39% since Dec 24. Neither uncertainty in the United States caused by policymakers’ inability to timely reach a consensus and finally avert contractionary policy measures nor acknowledgement of tough times lying ahead by Eurozone leaders forced the single currency to fully pare its prior gains. It must be admitted that optimistic conviction of investors was notably shaken, especially on Dec 28, when the Euro plunged 0.5% in four hours. Nevertheless, in the end Euro-bulls managed to recuperate and defend their positions.



While in most cases Euro price increases were shallow (+0.19% against GBP) overall positive performance was mainly secured by EUR/JPY, which was a step away from a 2% surge over a five-day period and thereby may be considered as one of the primary reasons why the Euro index is still afloat and above its base value. In the future we could continue seeing the bullish momentum weakening, though witnessed resilience of the Euro improves the chances to inspire extension of a rally.
The Swedish Krona was the only major currency to find itself in larger demand, rallying more than one per cent across the market, while the Swiss Franc was nearly unchanged relatively to the Euro (EUR/CHF down by 0.04%).

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Highlights of the latest Market Research on USD:



Even though the term “fiscal cliff” palled due to its constant use in mass media, there is no way one would not mention it, especially whilst describing behaviour of the U.S. Dollar. However, worth of the most traded currency in the world stayed nearly the same throughout the whole period from Dec 26 up until the very end of 2012, with only few deviations from the base value, which did not exceed 0.24%. Overall, during the last five trading days the Dollar slightly declined (-0.09%), as persisting uncertainty did not give any incentives neither to buy nor to sell the greenback.



Price of the U.S. Dollar advanced the most relatively to the Yen, soaring 1.64%, as a new Japanese government is awaited to insist that the Bank of Japan resorts to more aggressive measures. On the other hand, high-beta currencies, AUD and NZD, to name a few, were appreciating, anticipating favourable outcome of negotiations conducted by the U.S. politicians, which, as we already know, veered the economy away from an imminent recession if they did not reach consensus timely.
In near future we may expect the U.S. Dollar to lose some ground, as markets are currently full of optimism and there is still time until we start discussing debt ceiling, a discussion that potentially could pose a threat to risk-on sentiment.

Economic Research of Currency Pairs' Returns: Risks

The Dukascopy Bank SA research department continues its work on statistical properties of currency pair returns. The previous part of the research marked out relationships amongst returns. It was therefore dedicated to a somewhat determinate aspect of their behaviour. In this issue we look into uncertainty of the movements and investigate the parameters that can help reduce it.

The most widely quoted measure of uncertainty in asset movements is volatility. Some sources position it merely as a measure of risk, while others go as far as proposing associated trading strategies. Therefore we set a goal to investigate properties of volatility and see what information it can actually carry.

We base the study on our five top traded currency pairs: EUR/USD, GBP/USD, USD/JPY, USD/CHF and EUR/JPY, - as they seem to be of the greatest interest to our clients. The data used are different frequency exchange rates (2012 ten minute and one hour rates, and 2000-2012 one day rates).

Results
1. Each currency pair has a specific volatility range.



2. Volatility tends to linger on the achieved level.



3. Volatility of high frequency rates is periodical.



4. Volatility scaling often gives significantly inaccurate results.



Conclusion
In this research we have looked into instability of exchange rates and possibilities to reduce its effects. It appeared that under certain circumstances some prognoses are possible. Their accuracy, however, is limited to expecting one or the other level of volatility.

We have found that the magnitude of exchange rate fluctuations changes gradually, and that less stable times generally last longer than calm ones. In addition, high frequency rates seem to be more volatile in the middle of the day, while evenings and mornings offer a calmer picture. This might be useful for both risk-averse and risk tolerant investors while choosing a more preferable trading time.

Scaling appeared to be a rather inaccurate way to convert volatility. It tends to under or overestimate risks, depending on the magnitude of the scaling factor. However, sometimes it is impossible to manage without conversion. In such cases it is important to estimate not only the value, but also its possible error.

Finally, we have established that each currency pair has a typical volatility level, and that some pairs are more unstable than others. Thus, it is possible to balance risks and profits by taking into account this “instability ranking” of currency pairs. However, we have also seen that the levels can change over time. Therefore, to try to use volatility, one must monitor it closely to capture any changes in behaviour.

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Highlights of the latest Market Research on GBP:



As demonstrated by performance of the currency index for the last two months, the Great Britain Pound is hesitant to travel far away from its base value, on average being stable relatively to its major counterparts. In case the deviations do in fact occur, they are often followed by offsetting moves, bringing Sterling’s value back to status quo. Even though the monthly changes of EUR and CHF are lower (0.26% and 0.47%) than those of the Sterling, the distances between their peaks and troughs are significantly wider, implying that the Pound is less inclined to respond to market events and changes in the sentiment.



Such neutrality of the currency is secured by the fact that Bank of England stays in shadow and avoids coming into the spotlight, unlike the Federal Reserve and the Bank of Japan. No new measures were undertaken recently by the U.K. monetary authority and the market does not expect any significant variation of the policy, which is currently deemed to be fairly predictable.
The notable distortion, however, could be introduced provided that current estimates miss U.K. real economic growth in the last quarter of 2012. Still, given prior readings, the risk to the upside seems to be more likely, which translates into the outlook being from neutral to positive on the British Pound.

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Highlights of the latest Market Research on EUR:



With only Eurozone manufacturing data during the last week being slightly disappointing, the single European currency is still being weighed upon, while inflation and employment indicators pointed to a brighter side. Resolution of the issue with continuation of the stimulus programme in the United States also did not notably benefit the Euro, despite being the most widely discussed topic lately, which has kept investors on their toes. Accordingly, market participants are currently avoiding taking on more risk by exposing themselves to the Euro, but prefer the New Zealand Dollar and other commodity currencies instead.



On average throughout the last five days the Euro has lost 0.91% and has managed to outperform only the Japanese Yen by 1.39%. It stayed generally unchanged relatively to the Swiss Franc, but depreciated in the rest of the pairs, retreating from 0.66 to 2.16 per cent since Dec 31.
Nevertheless, overall the currency is still 1.28% above the level it was a month ago and 3.7% above the level it was a half of a year ago. Moreover, the negative tendency appears to have come to an end, as a value of the Euro stabilised ahead of the weekend and thus may recommence a recovery, although likely at a slower pace than previously.

Our first webinar guest in 2013 is Pr. Sankarshan Basu, Indian Institute of Management Bangalore, who joins us today at 12:00 GMT to consider issues in emerging markets, in particular, the Indian markets. As always, we encourage you to tune in and ask questions that you have on the matter!
More info.

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Highlights of the latest Market Research on USD:



An initial 0.6% decline in Dollar’s worth turned out to be misleading, as the follow-up surge not only pared the losses, but also pushed the currency index 1.1% above the base value, proving brevity of the market’s focus on the topic of “fiscal cliff” once the deal was agreed upon. Soon after that the market participants became concerned with changes the Federal Reserve System may introduce, namely partial reduction of stimulus currently provided to the economy. This was instantly translated into a sharp appreciation of the greenback.



Unexpectedly, other events that took place on Jan 3 had no effect on the value of the Dollar—they moved its counterparts, JPY, EUR, CHF and GBP instead. The published data were related to the U.S. employment statistics, but still failed to elicit a notable response from the market, which remained quiet with respect to the U.S. Dollar until the FOMC meeting minutes were released.
Still, bearish sentiment towards the buck starts to reappear, as was demonstrated by performance of the currency on Jan 4 and Jan 7. Ever-increasing demand for riskier currencies, such as NZD, AUD and CAD, is constantly pushing the price of the safe haven downwards, which is expected to continue experiencing gradual debasement, given that the current tendency is preserved and no new shocks will be introduced to the market.

is this report a leading analysis or a lagging analysis?, here i attach my report ,

jan 9 report, http://www.forexfactory.com/showthre...79#post6352479

Market Research reviews performance of currencies in the past by looking at their various characteristics. On the basis of that we are attempting to make inferences about future. We also include confidence intervals for some of the currency pairs at the end.

Economic Research mainly tests different assumptions regarding the financial markets, foreign exchange in particular. It mainly focuses on the long-term recurring patterns and behaviour of assets in general.

, I do understand whats your report about and all data and indis, but what is not clear is Dukascopy Research Team bias over the currencies you are talking like Morgan Stanley shows in their Fx Pulse report or my report or different reports around the web?

In this research we mostly analyse past performance and provide how-did-we-come-here type of information, rather than where-are-we-headed type of info. However, we deem a study of importance of events also to be a useful insight into the markets. For forecasting purposes we employ technical analysis, which we regularly publish here. The latest issue (in pdf format) is to be found by following this link.

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Highlights of the latest Market Research on JPY:



For some time the Japanese Yen has delayed its debasement, as the investors became suspicious that the actions of the Bank of Japan in conjunction with the Japanese government would undertake in order to stimulate the economy would fall short of broad expectations of the market. This has allowed behaviour of the Yen to resemble its usual pattern and gain value amid risk aversion that was triggered by an unceasingly growing unemployment rate in the Eurozone and constantly reappearing signs of a protracted downturn in bloc’s economic growth. As a result, the Yen currency index advanced more than 0.6% beyond the base value.



The later events, however, have upset the remaining Yen-bulls, as the currency has plummeted 3.1% on average across the board within the next two days. While a decision of the European Central Bank not to lower the key rate served as a catalyst and had an indirect effect on the worth of the Yen, the general trend of depreciation (already –16.6% during the last 130 days) has been substantially accelerated by the decision of the Japanese government to push the economy away from the current detrimental direction and put it on the right track of growth and mild controlled inflation through expansionary fiscal policy measures, i.e. increased government spending.

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Highlights of the latest Market Research on EUR:



Barring the New Zealand Dollar and Japanese Yen, the foreign exchange market seemed stable until the meeting of the European Central Bank, being cautious ahead of the event. In the end it proved to be a wise decision. Mario Draghi has taken Euro-bears unaware by changing his tone to a more hawkish one and thereby bringing the value of the currency up across all of its crosses. The single unit has gained against the Swedish Krona the least (+0.91%), but at the same time outperformed the Japanese Yen the most (+4.08%), as the effect on the currency pair was amplified onwards by a supplementary boost granted to the Japanese economy.



On average the Euro has appreciated nearly two per cent within the last five trading days. This behaviour has marked a completion of a protracted period of relative lull, during which investors appeared to be hesitating to substantially alter their positions, leading to a more or less sideways trading in some of the EUR crosses. In a longer time perspective the single European currency continues its upward direction, as its relative strength index is already 6.42% above the levels seen six months ago. Given the current landscape, further appreciation seems to be a well-argumented scenario, especially once occurrence of good data from the Eurozone becomes more frequent and stable (which is hardly at the moment), but it should take on a more moderate character.

Something like this will be nice to see around,

This is a macro indicator, i load N macro fundamental variables (Mostly US) then i use some lagging and other leading, then i just find patterns in the outputs, the colored cells. My point is if you talk about fundamentals, you should have some model to back it up, i'm not referring to a theoretical model but a practical one lets say clear and simple the combination of this X variables on the positive side by a 5% could lead to an appreciation this because historical behavior showed a 65 of probability of this to happen, then you get into the fundamental relationship between this variables and then you have a great analysis people will look into,

I think people believe to much into technical and forget about the power of FX research and building your own methods and indis

Well thats my idea, that how i work

Keep posting,

Regards,

Gino32, thank you for your ideas and contribution to this thread.

Multivariable regression models do provide a great insight into the relationship between certain indicators and the price, as they are relatively precise, unbiased and give a wide picture of what is currently happening in the market, i.e. what investors focus on. It would be interesting to know what variables do you use and why did you choose them, since there is a great amount of data and thus selection process is quite complicated.

Concerning our researches, for now we do not plan to incorporate this approach, as we mainly focus on the past events and do not aim to forecast performance of a specific currency pair in the future, but review the impact of data releases and the general trends in the market. Still, we will consider, whether a similar model will be relevant to our analysis, thank you.

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Highlights of the latest Market Research on USD:



Worth of the U.S. Dollar remained buoyant throughout the last days, falling only 0.27% since Jan 9. Many other major currencies, such as AUD, GBP and CAD, were also stable and did not demonstrate any sharp movements, finishing the observed period close to their base values. Merely the Euro and Japanese Yen were the ones to remain sensitive to the incoming news, changing by 1.71% and –1.99%, respectively. The only time when the buck’s currency index slipped occurred last Thursday, as the ECB has expressed its reluctance to ease monetary policy further and thereby the Euro advanced at the expense of its counterparts.



Later on the greenback trimmed some of its losses, but overall is still exhibiting neutrality and absence of any ubiquitous trend that could be seen on all of its crosses. Thus underperformance of the U.S. Dollar relatively to the EUR, AUD, NZD and SEK was almost completely nullified by surges in USD/JPY and USD/CHF currency pairs.
The Dollar also exhibits strong resilience and unwillingness to depreciate. The start of the current week promised to weigh on the currency, since Fed doves were delivering speeches. Nonetheless, there appears to be no noticeable effect yet in this regard, even though the recent FOMC statement has significantly increased demand for the USD.