Dukascopy Market and Economic Research

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Highlights of the latest Market Research on USD:



The value of the U.S. Dollar exhibits stability, it has only dropped .01% during a week and a slight disbalance between the two major factors currently defining the price of the currency could entail significant changes. The factor that is weighing upon the greenback is the fundamental data. Releases on U.S. unemployment claims, manufacturing sector and GDP, all suggest that economic recovery is skittish and requires care from the monetary authority throughout 2014, since the maximum employment level is far from being reached and inflationary risks remain low.



From the other side with the same power the value of the U.S. Dollar is pushed upwards by the increased demand for the currency, as, even though weakening relatively to past performance, the U.S. economy demonstrates more resilience and potential than many other developed counties. This reinforces safe haven status of the national currency and increases its attractiveness amid the difficulties encountered by the Eurozone and United Kingdom that struggle to escape recession, hence the .44 and .53 per cent appreciation of the Dollar comparatively to the Euro and British Pound respectively. However, USD does not outperform all of the high-beta currencies: its price has lost .13% in terms of the loonie and .2% in terms of the kiwi.

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Highlights of the latest Market Research on JPY:



Before the monetary policy statement of the BOJ the Japanese Yen was not considered to be bearish. Quite the opposite, market participants were expecting completely different rhetoric of a newly appointed head of the central bank from what was announced yesterday. Even in the face of daunting fundamental news on manufacturing and average cash earnings, which only added to the signs of Japanese economy’s weakness, the demand for the Asian currency among investors was exceeding supply and drove the price higher, as Kuroda’s actions were anticipated to fall short of the claims.



As it turned out, the governor was not willing to postpone actuation of his pledge to steer the anaemic economy away from deflation. And indeed, why would he wait, if the approach of the former chief has proven to be unsuccessful (inflation targets were missed by a wide margin) and the country was still suffering from the downturn that previous leadership did not manage to overcome. As a result of Kuroda’s move, the Japanese Yen’s index has wiped off all of the recent gains and depreciated more than three per cent on top of that. Against the Swiss Franc the Yen has lost the most during the last five days—3.7%, while the smallest change was recorded in its pair with the Swedish Krona (-2.6%).

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Highlights of the latest Market Research on EUR:



The single European currency has outperformed all of its major peers except for the Swiss Franc, relative to which it lost 0.2%. At first, however, the investors were hesitant to take any bets on the Euro ahead of the ECB press conference on Apr 4, as the probability of the central bank cutting the interest rate was considered to be increasing. Another variable that kept many market participants guessing was the BOJ monetary policy statement, as opinions of analysts were divided with respect to the timing of Kuroda’s plan actuation.



In the end both of these events proved to be beneficial for the value of the Euro, which appreciated at the expense of the Japanese Yen (+5.9% within two days), while Mario Draghi refused to intensify accommodative monetary policy and at the same time assured that the 17-nation bloc will preserve integrity and the institution under his supervision will provide any necessary aid to support stability. In addition to that labour market improvement in the United States failed to maintain the accelerated pace and thereby suggested that the Federal Open Market Committee will refrain from wrapping up the monthly asset purchases ahead of the schedule.

Economic Research: Safe-Haven Currencies

Safe-haven currencies are believed to serve as a reliable investment in times of economic instability. However, the methods for identifying such currencies remain more intuitive than systematic. In this issue we employ one of the possible strict definitions to see which currencies can be called safe-haven and whether this property varies over time.

In this research we will examine safe-haven properties in relation to economic indicators. Namely, a currency will be called a safe-haven if it tends to appreciate when the financial market depreciates or faces great instability. Additionally, to make the study less complex, we will limit the global concept of a safe-haven currency to being “a safe-haven in a particular currency pair”.

We have chosen to pair the examined currencies with the U.S. dollar, concentrating on USD/JPY, USD/CHF, GBP/USD, NZD/USD, USD/CAD, AUD/USD, EUR/USD, USD/SGD, and USD/SEK. The financial market, in turn, is represented by Standard & Poor’s 500 Stock Price Index and 10-Year US Treasury Notes, with instability measured by currency market volatility (see the Appendix for further information). All data is collected over the period from 1993 to 2013.

Data used in the research: 1993 – 2013 returns (%) on S&P and T-Notes, and market volatility for JPY


Results
1. Safe-haven properties are time-dependent and can be observed in different currencies.

Cumulative daily returns (%) during financial crisis of 2007-2008


2. The Japanese yen shows the strongest safe-haven patterns.

Linear model coefficients with t-statistic (in braces) for pairs XXX/USD


3. JPY, CHF, and EUR show safe-haven properties more often than other currencies.

Moving correlation coefficient for JPY over 100 day window


4. JPY shows clear safe-haven patterns only against USD.

Conclusion
We have performed several types of analysis to examine safe-haven properties in nine currencies. It turned out that such properties are not permanent, and can be observed in different currencies at different times. Furthermore, safe-haven patterns seemed to be better pronounced as a response to S&P be-haviour rather than one of market volatility or government bonds.

JPY, CHF, and EUR appeared to act like safe-haven currencies more often than others. However, the periods when the safe-haven properties held seemed to be unpredictable. Moreover, some currencies that are not generally considered safe-haven also occasionally showed the same properties. GBP per-formed well in one of the preliminary tests, but fell behind other “presumably safe-haven” currencies later on. Currently only the Japanese yen in pair against the U.S. dollar shows safe-haven patterns in its behaviour.

Such findings show that the group of safe-haven currencies is not constant, and currencies tend to change their behaviour under different circumstances. It should be taken into account by the investors who seek to secure their holdings in times of economic instability. Otherwise a seemingly reliable investment might unexpectedly turn into an unprofitable one.

Dear traders,

Re: Quarterly Report

The last quarter on Dukascopy’s timeline was marked with several notable events. We have formed alliances with new partners, the range of usable leverage level has been substantially widened to meet various needs, the Hong Kong Dollar has been made available as an account base currency - all part of the endeavour directed towards improving your trading and making your experience with us enjoyable as possible.

Also, we are not planning to abandon our constant quest for achieving better quality, wider spectrum, and new depth of analysis in our informational products. Therefore we constantly update and add new features to FXSpider, our in-house developed news-aggregation tool. Beyond that, we increase the coverage of Forex and economics related substance on the Dukascopy Live TV, where traders broadcast for traders. Join our FX Community, share your ideas, win prizes, and acquire new knowledge with us.

And after this intro to the latest developments I would like to welcome you to get acquainted with our latest effort to deliver to you the most relevant and interesting information on the Forex market that is contained in our Quarterly Report.

Wishing you the best of luck,
Alexander Suhobokov, CFA, FRM
Head of Research
Dukascopy Bank SA

Dear traders,

We are glad to offer you our monthly research product - Dukascopy Bank Sentiment Index. In this report, the findings are based on a survey of 30 experts from academia (10 from every region in focus), who are asked to assess the current and future (six-month and three-year) economic prospects of the three regions: Europe, North America and Asia-Pacific.

Major highlights of the recent report:
- The six-month and three-year global economic expectations were little changed in March from the previous month. The six-month economic sentiment index declined 0.01 to 0.56, a Dukascopy Bank SA poll showed. The three-year economic outlook was unchanged at 0.69.
- Respondents became significantly more pessimistic about the six-month and three-year European economic prospects. The six-month and three-year indices fell to 0.28 and 0.46, down from 0.35 and 0.54 in February accordingly.
- North American three-year economic sentiment was unchanged at 0.78 from the prior month, a survey showed. The six-month economic outlook improved 0.02 to 0.65, the highest level since November 2012.
- Asia-Pacific six-month economic expectations rose to 0.74. The three-year economic prospects jumped 0.10 to 0.83.

All of the previous issues are available here.

Full research is available here.

Highlights of the latest Market Research on USD:



Judging by the equally-weighted index of the U.S. Dollar alone, we may predicate that it stayed neutral, along with its Australian and Canadian counterparts, throughout the last five trading days, changing only by 0.35%, while such currencies as the Euro and New Zealand Dollar deviated as much as 2.1 and 1.2 per cent within the same time period. However, this would be a flat view of the recent developments. In reality the Dollar was weighed upon by the unsatisfactory results of the current policy. Unemployment claims are rising, new job creation is falling behind the schedule and optimism in the services industry is subsiding.



This is seen from the buck’s performance relative to its major peers, excluding the Japanese Yen, unprecedented debasement of which distorts the overall picture, leading to somewhat misleading results. Studying each currency pair (participating in the calculation of the index) separately, reveals that the U.S. Dollar lost against the Euro (2.1%), against the British Pound (1.5%), against the New Zealand Dollar (1.4%) and some of the other currencies. The greenback stayed unchanged relative to its northern counterpart, but has gained nearly 6% in its pair with the Yen. Accordingly, as soon as the bearish pressure on the Japanese currency subsides, signs of which can be already observed, the currency index should start to sink.

Full research is available here.

Highlights of the latest Market Research on CHF:



Over the last few days the Swiss Franc was one of the least variable currencies, as its currency index has changed by merely 0.19% since Apr 5. However, at the very beginning of the reviewed period the Franc appreciated on average by more than 0.5%, though the rally was invoked by external events. The buoyancy was provided by substantial enhancement of BOJ’s asset purchase programme combined with the signs of bleak recovery in the North America, though the Swedish Krona was the biggest winner, gaining 1.3% within the day.



Because the Swiss Franc benefitted from Japanese Yen’s weakness (CHF/JPY rose by 3.9%), the Swiss fundamental data, such as retail sales and CPI (both fell short of expectations), did not find their full reflection in the equally-weighted index. Still, they have taken their toll and trimmed a portion of the gains made last Friday. As for the long-term trend, the Swiss Franc continues to increase in value despite continuous effort of the SNB to curb strength of the national currency. The traces of this battle are mirrored in the central bank’s balance sheet, which is expanding according to the latest data on foreign currency reserves.

Full research is available here.

Highlights of the latest Market Research on EUR:



Last week the Euro posted timid gains of 0.2%, failing to appreciate at the expense of the weaker Yen that has lost nearly 24% of its value during the six-month period. The main beneficiaries of the down-trend in the Japanese currency were Oceania currencies plus the Swedish Krona, while the Euro remained depressed by the fading optimism among households and businesses. In the meantime, the fundamental data started to show positive signs. Industrial production in the 17-nation monetary bloc, for example, expanded by 0.4% after a 0.6% contraction.
Attached Image (click to enlarge)



Performance of the Euro could have been better, however, a recent report of the U.S. Treasury exposed the latest changes in the Japanese central bank’s monetary policy to criticism, triggering a correction in the Yen’s debasement, which in turn prevented appearance of a potential rally in the Euro. This message had a particularly strong effect on the foreign exchange market due to the fact that the G-20 meeting is approaching. The forum is scheduled for the end of this week and is highly likely to contain thorough discussion of competitive devaluation of domestic currencies that is still taking place and is distorting the conditions of fair trade between the countries.

Full research is available here.

Highlights of the latest Market Research on USD:



Data flow on the economy of the United States is presently dominated by bearish news. Industrial production growth is slowing down, the volume of retail sales is contracting. Moreover, consumer prices started to fall, threatening with unhealthy for the country deflation, as currently exemplified by Japan. However, as demonstrated by the stability of the U.S. Dollar currency index over the last few days, investors were not willing to get rid of the greenback, even though the healing process of the world’s largest economy is likely to take more time than previously estimated.



The buoyancy of the Dollar in spite of negative informational context was provided by the commodity currencies that took a heavy hit from grim statistics on the Chinese gross domestic product that is not able to keep up the intended pace of expansion. The buck appreciated against its Australian counterpart the most—1.1%, while it also gained relative to the Canadian and New Zealand Dollars 0.6 and 0.5 per cent respectively. On the other hand, the Japanese Yen outperformed the U.S. Dollar by 1.2%, as a currency report of the U.S. Treasury contained criticism of Japan’s endeavour to revive growth through devaluation of the national currency.

Full research is available here.

Highlights of the latest Market Research on GBP:



Based on the dynamics of the average correlation coefficient, the main purpose of which is to quantify the level of significance for a particular currency, we can also identify the events that altered the relationships between this currency’s crosses the most. As already discussed, at first the Pound and its pairs were influenced by the update on the tendencies in the world’s second largest economy, which in turn had spurred demand for safe haven currencies, lowering the importance of the Sterling in the international arena.



However, shortly thereafter, a report done by the Office for National Statistics on the trend in prices of goods and services in the United Kingdom restored the status quo, and a drop from 0.35 down to 0.21 on Monday was fully reversed. Nonetheless, this is insufficient by a wide margin to name the Pound as the main or at least one of the main drivers of the exchange rates. Currently the Japanese Yen carries this title and this is highly unlikely to change any time soon.
Regarding the correlations studied, their changeability was greatly increased these five days. Some of them, for example GBP/USD with GBP/AUD and GBP/USD with GBP/NZD, have weakened dramatically, while in the majority the 50-hour correlations did not travel far away from the centres of their distributions.

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Highlights of the latest Market Research on EUR:



News at the end of the past week proved to be unable to drive the volatility levels in the market beyond those reached on Mon, Tue and Wed as they do usually. Dukascopy Bank Volatility Index on Apr 18, amid the unemployment claims and manufacturing index, was maximally 1.6, but at the same time was as high as 2.1 last Monday, when turbulence in the market peaked after Chinese GDP figure revealed that there is no economy in the world that is fully is immune to the global slowdown. A measure of elevated volatility, as a percentage of time, in this case is a more telling evidence of the changes introduced by this update.
Attached Image (click to enlarge)



Within the last five days the share of DBVI values above a threshold of 1, representing historical variability of an instrument or a series of instruments, was 55%, while normally we would expect this gauge to be in a range between 20% and 30%. Moreover, if we take Apr 15 in isolation, then this percentage jumps already to 86%, meaning that the news has primarily impacted the longevity of periods of heightened volatility, while the influence on the actual volatility levels was secondary. A level of 2.1 recorded just recently is far below 5.2 seen in mid-March, when the conditions of Cyprus bail-out were made public, although the latter occasion had an effect only for several hours, compared to three days of increased turbulence triggered by the underperforming Chinese economy.

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Highlights of the latest Market Research on USD:



According to the data on the equally-weighted indices of nine major currencies for the last five trading days, demand for the U.S. Dollar dwarfed appetite for its main peers, as it has gained the most, namely 1.6%, since Apr 17. Respectively, it would be reasonable to assume that the situation in the world’s largest economy is robustly improving. However, the relevant fundamental indicators are either in a standstill (real estate market) or even deteriorating (manufacturing sector), calling into question whether the greenback is in fact deserving such a distinct rally.



And while a review of the U.S. economy taken separately yields a ‘no’ answer, collation of its state with various counterparts reveals that the developed world is falling even more behind the forecasts, highlighting relative success of the Americans. Against this background the sentiment in the financial markets was bound to worsen, increasing willingness of investors to seek refuge in safe havens. Moreover, Europe surprised with new talks on easing. Last Wednesday words of Bundesbank President goaded market participants into selling the Euro, while at the same time supply of the Swedish Krona grew amid Riksbank expanding the period of low interest rates to support the economy.

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Highlights of the latest Market Research on JPY:



Fate of the Japanese Yen was largely dependent on the outcome of the G20 meeting that took place near the end of the last week. Many feared that the international community will not tolerate ubiquitous debasement of the currency, which is creating unfair conditions of competition. Accordingly, there was a substantial risk of opposition to aggressive easing measures implemented recently by the Bank of Japan. However, Japan has managed to defend its position and world’s wealthiest nations gave their consent to the latest attempt to end the dull for economic activity period of falling prices.



Hence, it was a great relief for Yen-bears, when the major obstacle to depreciation of the national Japanese currency was removed. As a result, there was a vertical 1.1% decline in Yen’s index last Friday. However, this week the sell-off did not go on, as one would expect. Dismal data from various regions of the world took investors by surprise and risk-off sentiment prevailed since then. The largest rally was recorded on Tuesday amid considerably worse-than-expected statistics on Chinese manufacturing. But this was not the only factor that boosted demand for the Yen. Japanese exporters were reported to be selling the U.S. Dollar in exchange for the Yen, as their needs for the domestic currency have increased.

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Highlights of the latest Market Research on EUR:



A 0.6% decline of the Euro’s equally-weighted index throughout the last week was well-justified by the most recent fundamental data. Even though the consumer confidence has somewhat improved, as reported at the beginning of the week, the following news—on contracting manufacturing and services sectors, on worsening business climate and on rising unemployment, all signalled that a recovery is far from being guaranteed and the struggle for positive growth in the monetary union continues.



However, we must note that a significant role in Euro’s depreciation occupied U.S. unemployment claims published on Apr 25 right after the noon. While the average value of the single currency stood still amid Sterling’s 1% surge due to a promising GDP figure, it dropped a half of a per cent in an instant right after the better-than expected number of initial claims for jobless benefits. All in all the Euro managed to gain against only two currencies out of the other eight, performance relative to which is included in its currency index. The Swiss Franc strongly weakened on the speculation that the SNB will lift the floor of 1.20 francs per euro and the Swedish Krona suffered from an unexpected rise in the unemployment rate.

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Highlights of the latest Market Research on USD:



At the time when many analysts are discussing various exit strategies of the Fed out of the currently running QE programme, the latest tendency of the U.S. Dollar is clearly showing the general expectation of market participants. The currency has already lost 1.9% during the last five days on average relative its major counterparts. This means that a background of faltering economic activity, demonstrated by unsatisfactory GDP figure, among other examples, was felt particularly strong ahead of the FOMC meeting, with many saying supplementary boost to support is required to secure future growth.



The negative sentiment with respect to the greenback was so strong that none of the major currencies were more bearish than the buck, even though the Eurozone unemployment is persistently moving higher, Sweden is suffering from appreciating currency and now there are more people doubting the effectiveness of the recent BOJ action. The Dollar has lost the most to the Japanese Yen and the Swedish Krona, namely 2.5 and 2.6 per cent respectively. The smallest changes were in USD crosses with the Euro and Aussie, -1.3 and -1.1 per cent respectively.
In the longer term perspective the U.S. Dollar is retreating from recent highs and is headed towards the levels seen a half a year ago. To return to them the currency has to depreciate 1.6% more.

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Highlights of the latest Market Research on CHF:



While it is not a surprise that the Euro and Swiss Franc are highly correlated, it appears as if the Franc is upward-sticky relative to the single currency, when it comes to reaction of the currencies to the latest news. Throughout the whole week the Swissie was gaining more and at the same time losing less than the Euro. This pattern became especially clear on Apr 30 and was preserved until now. On Tuesday the Franc appreciated 0.4%, while advancement of the Euro was much more timid—only 0.12%. Next day the Franc appreciated 0.45%, while the Euro was up by 0.21%.



This feature of the Franc, i.e. its robustness, helped the currency to outperform most of its peers, as the return of its equally weighted index amounted to 0.57% - third highest value after the Swedish Krona and Japanese Yen, appetite for which turned out to be stronger. Conversely, U.S. Dollar and its New Zealand and Australian counterparts were the weakest this week amid piling up arguments in favour of QE continuation beyond the currently set end date and worsening outlook in Oceania countries that did not prove to be immune to slowdown in other regions, on the contrary, they remain highly sensitive and constantly remind us that.

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Highlights of the latest Market Research on EUR:



The single European currency turned out to be highly buoyant recently. Its exceptionally strong resilience to weak fundamental data was demonstrated by the fact that the currency index gained 0.26% despite the seemingly negative sentiment created by the inflow of the latest data. Although key economic statistics, including unemployment rate and inflation, came in worse than expected, bulls proved to be constantly on guard and reflected each and every attack of bears, restoring the value of the Euro once any sign of softening appeared.



This was even more so prominent against the backdrop of the ECB’s rate cut and lowered forecasts on Europe’s growth by the European Commission. This news should have sent the common currency well below its initial valuation, but something kept investors willing to hold on to the risky asset. Judging by the performance of the Euro against its counterparts, it was rather bearishness of the Japanese Yen (-1.91%), accompanied by declining price on the U.S. Dollar (-0.57%) that has pushed worth of the Euro up, rather than strong conviction of public that the Eurozone is going to recover in the nearest future, an arguable scenario, given the recent tendencies, to say the least.

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Highlights of the latest Market Research on USD:



The U.S. Dollar started to appreciate last Wednesday, even though the data published was somewhat softer than expected and thereby implied increased likelihood of quantitative easing programme prolongation. It could be then argued that the market gave the U.S. economy the benefit of the doubt, expecting positive data later on, which in the end proved to be a correct bet. The key factors defining expensiveness of the Dollar played their role—number of claims for jobless benefits declined and unemployment rate fell, benefitting the buck.



The only unpleasant stain amidst generally optimistic information was left by the services index that negated the bullish impetus of the U.S. currency, which in turn trimmed the gains made on signs of improving labour market statistics. However, the negative effect was in force only on Friday, and the greenback returned to the upward course already this week and continues to increase in value relative to its major peers, specifically against the Asian currencies, all of which were sold off due to attempts of the respective governments and central banks to reignite the economies through various expansionary policy measures. In the meantime, the U.S. Dollar and its northern counterpart are inclined to move in unison, failing to do so only last Thursday, as their currency indices diverged amid the abundance of significant news that distorted this tendency.

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Highlights of the latest Market Research on GBP:



Sentiment of the market with respect to the British Pound was not univocal during the past five trading days, following an inspiring GDP figure published on Apr 25 that resulted in a bullish run against some of its main peers. While the Sterling’s price in terms of the Yen increased 2.3% and more than 1% in terms of the Swiss Franc, Australian and Canadian Dollar, the equally-weighted index’s gains were tepid—0.45%. This could be explained by Pound’s underperformance relative to North American currencies with long-standing strong correlation, as regional news keep surprising on the upside.



Another reason is Pound’s sharp half-of-a-per-cent drop on Tuesday that could have been triggered by a dim report on U.K. consumer spending in conjunction with a downswing in gilts and the declining optimism of U.S. consumers, although there were no particularly significant events that day.
In a monthly perspective the British Pound proved to be the top performer, on average appreciating by 2.16% amid its crosses, closely followed by the Canadian Dollar with a 2.08% advancement in valuation. On the other hand, if we take six months worth of data, turns out that the currency is still below the levels recorded half a year ago.