Dukascopy Market and Economic Research

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Highlights of the latest Market Research on EUR:



Overall the past week favoured broad strengthening of the single European currency. Many of the economic reports published lately on the Eurozone and other regions as well have been positive (U.S. unemployment claims), bringing the optimism and risk-on sentiment back to the market. These were mainly German factory orders and manufacturing production, which gave impetus for more market participants to bet on appreciation of the Euro, which became a more attractive investment tool.



Moreover, concurrent debasements of Australasian currencies, namely AUD and NZD, have also played a notable role in the 0.65% rally of the Euro’s currency index. While the demand for Australian Dollar was dampened amid the rate cut by the Reserve Bank of Australia on May 7, price for its New Zealand counterpart was lowered as a result of RBNZ’s intervention, being that the central back deems current exchange rates as overinflated and is seeking ways to curb strength of the national currency. However, the gains could have been greater, since the market remains wary of possible rate cuts by the ECB, which has already decided to put more effort into promoting growth with the decision on May 6 to make loans more accessible.

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Highlights of the latest Market Research on USD:



Dollar-bulls have been completely dominating the foreign exchange market lately, driving the equally-weighted index of the currency more than 2% during five past days. The surge was initiated last Thursday, with the speculation that the Federal Open Market Committee is going to wrap up the QE programme ahead of the earlier announced schedule. For now these rumours have not turned out to be true, but there are good reasons why this idea has become so popular among market participants, who see improvement in various economic indicators, primarily in the U.S. unemployment claims.



And while the number of applicants is falling, the volume of retail sales is growing and inventories of the U.S. firms are depleting, some members of the FOMC start expressing their opinion that there is a need to slow down the monthly asset purchases, as regarded by Charles Plosser, president of the Philadelphia bank, yesterday. Accordingly, the greenback has outperformed all of its major counterparts since May 8, gaining the most relative to the Yen (+3.25%), since Japan avoided direct criticism from the G7 of its ultra-loose monetary policy. The smallest change among Dollar’s pairs was observed in EUR/USD, which went 1% in favour of the buck, being that popularity of the optimism has grown substantially recently.

We have recently released a new issue of Dukascopy Bank Sentiment Index for April.

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There is also a VIDEO version available on-line!

Summary of the report:
- The six-month and three-year global economic expectations climbed in April, a Dukascopy Bank SA poll showed. The six-month economic sentiment index advanced 0.05 to 0.61. The three-year economic outlook rose to 0.71, up from 0.69 in March.
- The European six-month and three-year economic sentiment indices advanced, a survey showed. Economic expectations rose 0.13 and 0.12, to 0.41 and 0.58 respectively.
- Respondents became more pessimistic about the six-month and three-year North American economic prospects. The six-month and three-year indices fell to 0.63 and 0.72, down from 0.65 and 0.78 in March accordingly.
- The Asia-Pacific six-month economic outlook improved 0.04 to 0.78. The three-year economic outlook was unchanged at 0.83, the highest level in more than a year.



The figure below presents the term structure of the Dukascopy Bank Sentiment Index (Y-axis) mapped against GDP growth forecasts made by poll respondents (X-axis). Overall, DBSI values and GDP growth forecasts match directionally, suggesting the global economy will improve three years from now.



The figure below presents the business cycle and its phases - expansion (real GDP is increasing), peak (real GDP stops increasing and begins decreasing), contraction or recession (real GDP is decreasing), and trough (real GDP stops decreasing and begins increasing). (Yellow - Europe, Blue - North America, Green - Asia Pacific; Circle - 3-month Economic Development Stage, Triangle - 6-month Economic Development Stage).

Economic Research: The Day-Of-The-Week Effect

The day-of-the-week effect is one of the calendar anomalies of the stock market. According to this phenomenon, average daily returns are not constant over the week. Furthermore, it suggests the tendency of assets to have lower average daily returns on Monday and relatively high daily returns at the end of the week.

In this paper we will examine the day-of-the-week effect in the Forex market. We will see if the effect occurs in currency returns, and, if so, whether it is
similar to the stock market anomaly. For this study we have chosen the top five of our most traded currency pairs: EUR/USD, GBP/USD, USD/JPY, USD/
CHF, and EUR/JPY. The data consist of daily closing exchange rates and cover the period from January 2005 to March 2013. However, due to the
eventfulness of these eight years, the behavior of daily returns could have changed. Therefore we have divided the period into two parts – from 2005 to
2008, and from 2008 to 2013.

Results
1. Average daily returns for separate days of the week are not significantly different.
The average daily changes are around zero. For all pairs except USD/CHF, the lowest returns are observed on Mondays, but the highest on Wednesdays and Thursdays.



2. Regression results indicate that returns do not depend on the day of the week.

3. The day-of-the-week effect in the currency market is not stable.

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 behaviour rather than one of market volatility or government bonds.
Examining currency pair returns in relation to different days of the week produced ambiguous results. It appears that, on average, the Forex market has the lowest returns on Mondays in the whole period from 2005 to 2013 and at the end of the 2008-2013 period. That confirms the presence of the day-of-the-week effect for EUR/USD, GBP/USD, USD/JPY, and EUR/JPY in the periods mentioned above. For USD/CHF, on the other hand, the lowest average returns occur in the middle of the week, but Monday returns are often the highest. Therefore, we can conclude that the day-of-the-week effect is manifested in different days for different currency pairs.
Dissimilar results for different time periods imply that the effect is not stable in time. For instance, on Thursdays in 2005-2008, USD/JPY has its lowest average returns, but in 2008-2013 – the highest.
All examined GARCH models gave insignificant coefficients, suggesting that the dependence is not strong enough to rely upon.

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Highlights of the latest Market Research on JPY:



Usually the most volatile currency deviated the least from its base value, along with the Swiss Franc. Since May 10 the Japanese Yen gained only 0.11%, while in the previous reports its index changed by more than a per cent. This could mean that the Yen is becoming less sensitive to world events and therefore is losing its long-standing status as a major driver of the exchange rates, but we will return to this topic later in the report. In the meantime, the Yen appears to have lost its bearish momentum, which is distinctly visible in one-month and six-month perspectives, average debasement in which totalled to 2.7 and 22.9 per cent respectively.



The major reason why investors ceased the sell-off of the Asian currency is a glimmer of hope provided by the latest Japanese data. The GDP and industrial production numbers surprised on the upside, suggesting that currently pursued by the Japanese government and central bank policy is paying off. Still, the fact that bulls are not entering the market en masse shows that concerns persist among investors. One of the reasons to doubt Japan’s ability to overcome decades of stagnation is its dependence on import of energy, an issue that has become particularly topical in the light of closure of nuclear plants. Nonetheless, as reported on May 9, current account was positive and concerns may prove to be unjustified.

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Highlights of the latest Market Research on EUR:



If we simply look at past week’s statistics, we see that the 17-nation currency is doing well, its currency index was able to advance 0.3% since May 13. The Euro underperformed only relative to the U.S. Dollar (-0.9%) and Japanese Yen (-0.2%), while staying unchanged or outperforming the rest of its major counterparts. But the question is whether we can attribute this bullishness, even though fairly moderate, to improving fundamental economic conditions, which in turn would imply that this rally is well-justified and therefore sustainable.



To help us find the answer, we should determine the reasons why the currency was bullish or bearish at certain intervals. Last Tuesday Eurozone industrial production was reported to expand and ZEW economic sentiment to improve, increasing investor’s appetite for risk. The optimism was negated already next day by disappointing news on the bloc’s GDP figures, which came in less than expected. Subsequent appreciation of the currency, however, was not induced by positive statistics, as on May 14, but by weakness in Australasian currencies, values of which have been suffering from easing policies in the region, meaning that the Euro stands on shaky ground.

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Highlights of the latest Market Research on USD:



Over the past five days the U.S. Dollar has been behaving hectically, failing to adhere to one particular trend, being subject to contrary influences. Most of the external news, such as on Eurozone GDP, on RBNZ’s willingness to weaken the nation currency and on decelerating inflation in the United Kingdom, have benefitted the buck greatly, as demonstrated by morning rallies of the Dollar’s currency index on May 15, 16 and 21, respectively. Conversely, internal data showed that the economy of the United States has not yet recovered, implying extension of the stimulus and thereby erasing the surges.



Last week’s data was particularly disappointing, having delivered worse-then-expected data on nearly all possible fronts, including unemployment claims, producer prices, inflation, manufacturing sector and building permits. The only indicator to improve since May 15 was on consumer sentiment, but it was unable to prevent subsequent debasement of the U.S. Dollar, which nonetheless has ended the five-day period with a plus, gaining in value 0.44%. This was the second largest appreciation after a 1.38% advancement of SEK index during the same period (May 15—May 21). Unwillingness of investors to enhance their exposure to the Dollar was also induced by comments of various FOMC members, who continue to promote QE.

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Highlights of the latest Market Research on CHF:

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Considering a dearth of Swiss macroeconomic news published recently, it may be said with a high degree of certainty that the value of the Swiss Franc was almost completely a one-factor function of market’s expectation with respect to the quantitative easing currently conducted by the Fed. Judging by the timing and extent of the currency’s index largest moves, the Franc was as much sensitive as the Japanese Yen and the U.S. Dollar to the relevant to this topic news, largely behaving opposite to what the buck currency did, appreciating when Dollar’s value went up and depreciating when it declined.

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There were plenty of such examples during the last five days, being that the members of the FOMC did not seem to be unanimous when communicating plans of the central bank, future actions of which still remain unclear for the public, thus increasing the volatility. Perhaps the most prominent example of negative correlation between the Dollar and the Franc is the one recorded on Thursday, when the greenback became 0.6% cheaper within the first eight hours of May 23, while the equally-weighted index of the Franc at the same time would yield 1.1%. Despite this recent variability overall the Swiss Franc is not moving away from the levels seen a half a year ago, right now it is 1.2% more expensive.

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Highlights of the latest Market Research on EUR:

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The Euro extended its gains and added another 0.6% to its value since May 20. This rally was started last Tuesday, even though German PPI came in worse than expected the same day. Various reports on economies of other regions of the world also did not favour increased demand for riskier assets, being that U.K. economic activity remains weak and rate of U.S. real estate market’s recovery is falling behind expectations. Hence, additional reason for underperformance of traditional risk-proxies, but Euro stayed buoyant nonetheless.

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Further appreciation of the single currency, however, seemed to be more justified: growing current account surplus, ameliorating situation in services and manufacturing sectors and finally improving German business climate. External data in the second part of the week was also more positive than in the beginning with the number of unemployment claims falling and the volume of durable goods orders increasing. The only currency that managed to benefit from this situation more than the Euro was the Japanese Yen, equally-weighted index of which rose 1.36% for the past five days, being that many investors consider current levels good for profit-taking after Yen’s substantial debasement.

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Highlights of the latest Market Research on USD:

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We continue to observe absence of a smooth trend in the average value of the U.S. Dollar in a short-term perspective. Moves in the currency index were sudden and sharp, having no noticeable impact on subsequent development of the Dollar’s pricing. Such was the market’s reaction to testimony of Fed Chairman, when a more than 1% rally was followed by a sell-off of the same magnitude, leaving the overall price level largely unchanged, even though news on Thursday, being positive, have increased the likelihood of the QE being completely or at least partially stopped.

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However, if we look at a longer-term perspective, e.g. 20 or 130 working day period, there is more consistency demonstrated in the buck’s behaviour. Regardless of its hectic nature lately, it is still inclined to appreciate rather than to lose worth each week, meaning that investors are looking forward to the end of the asset purchase programme and are thus likely to continue pushing the greenback up. USD’s gains for a month totalled to 4.5% and for six months to 6.4%.

Meanwhile, the only currency to outperform the Dollar since May 22 (by 0.33%) was the Japanese Yen, which is considered to be undergoing a major correction in the short term amid profit-taking, while broadly being seen as bearish in the long term.

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Highlights of the latest Market Research on GBP:

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If the British Pound were to trade in isolation, its price would probably decline, as fundamentally the currency turned to be softer than before. The only positive news directly related to the United Kingdom was on consumer confidence, although technically there is no optimism among the consumers, only less pessimism. Accordingly, the value of the Sterling was mainly underpinned by indirect factors—weakness of its major counterpart, specifically weakness of the U.S. Dollar, an instrument that has failed to keep its winning streak, losing 1.3% of its worth during the last two days.

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This sharp decline, however, was not initiated by the disappointing data on the GDP, unemployment claims and home sales. They only reinforced the sell-off that took place on Wednesday, reinforcing fears of investors that we will have to wait before tapering becomes a reality, becoming good news for the currencies that usually remains stable, namely for the Pound.

Of note, since May 24 the Sterling has looked like a more stable version of the Euro, even though the correlation between these two currencies was not observed lately. Still, this interdependency will have to pass the test next week, when more volatility is expected.

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Highlights of the latest Market Research on EUR:

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As it turned out, better-than-expected data on Eurozone retail PMI was more than enough to keep the single currency afloat last week. It may be argued that Euro’s strength came from U.S. Dollar’s weakness, but the equally-weighted index of the former instrument commenced its rally a few hours before the data on U.S. GDP and unemployment claims became public. However, the appreciation did coincide with the sell-off of the Yen and a swift rally of the Swedish Krona, although they are hardly related, especially with the latter event.

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All in all the Euro finished the past week in first place, but took the lead in the very end. It seemed that either the New Zealand Dollar or Swedish Krona will prove to be the most bullish. Before May 30 the kiwi was 1% above its base value, enjoying the increased demand. Later on, the sentiment changed, being that the Reserve Bank of New Zealand expressed its willingness to intervene into the market should the rates continue to be overinflated, throwing NZD down by 2.8%. Meanwhile, positive Swedish GDP figure did not ensure a sustainable Krona’s price increase, since a closer look at the real drivers of the economy’s faster-than-expected growth implied that the problems, such as falling exports, persist and are yet to be resolved.

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Just a few more days and we will have a new release of Dukascopy Bank Sentiment Index (most likely on June 6)!
For now, here is the latest April report.

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Highlights of the latest Market Research on USD:




The news that have been published lately convinced investors that the fair value of the U.S. Dollar was significantly below the price of the currency at the time. Accordingly, this has led to a massive sell-off, resulting in a 1.4% loss of the greenback’s worth in five days’ time, while the maximum drawdown within the period totalled to more than two per cent. Even the currency index of the Japanese Yen that has already depreciated by 17% during the last six months has grown by 0.9% since May 29.

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The kiwi was the only counterpart the Dollar was able to outperform, although while the supply of New Zealand dollars was increased by a real threat of intervention by the RBNZ, fluctuations in USD reflected changes in the likelihood of the QE programme being either prolonged or shortened, as perceived by the market. The most significant influence on investors’ assessment of this probability had a report on the U.S. manufacturing. Instead of a timid growth of the sector, the actual data showed that the positive tendency did not persist, but was replaced by a contraction. Nonetheless, despite the sharp decline, performance of the Dollar for the last 20 and 130 days is positive—2.1 and 5.1 per cent respectively.

Highlights of the latest Marker Research release on JPY.

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There was not a single day since May 31 when the cumulative gains of the Japanese Yen were surpassed by gains of any other major currency. Over the five-day period the Yen appreciated on average by 3.3%, although the increase, as it usually happens in the foreign exchange market, was not gradual, but was characterised by short-term sprints. Just within Friday a portfolio consisting of equal investments in the Asian currency across its pairs would have yielded 1.23% amid substantial improvement in Japan’s industrial sector.



Advancement of the index this Wednesday was a little less impressive—1.19%, but the Yen was priced at the highest level next day, on June 6, when inconsistent data on the U.S. economy, coupled with the not-so-convincing speech of Shinzo Abe on his future plans to improve the situation in the country, resulted in a 1.86% rally within a couple of hours. Subsequently there was a retracement in the exchange rates, but the Yen is still 1.29% more expensive than the second most bullish currency—the Swiss Franc. The Yen has also outperformed its main counterparts during the last 20 days, adding nearly 6% to its value, but at the same it is the most bearish in a six-month perspective with a loss amounting to 14.86%.

The newest release of the Sentiment Index is finally here!
Video version will be available next week.

These are some of the highlights of the report:
- The six-month and three-year global economic expectations were little changed in May from the prior month. The six-month economic sentiment index fell 0.01 to 0.60. The three-year economic outlook was unchanged at 0.71.
- The European six-month and three-year economic sentiment indices advanced, a survey showed. The six-month economic outlook rose to 0.42, the highest level since records began in 2011. The three-year outlook improved 3 points to 0.61.
- Respondents also became more optimistic about the six-month and three-year North American economic prospects. The six-month and three-year indices climbed to 0.66 and 0.73, up from 0.63 and 0.72 in April accordingly.
- The Asia-Pacific six-month and three-year economic outlook sentiment indices declined 0.05 to 0.73 and 0.78 respectively.

Highlights of the latest Marker Research release on EUR.

Full research available here.

Judging by the levels at which the average correlation coefficient was fluctuating, the 17-nation currency was not significant. The U.S. Dollar and even to a greater extent Japanese Yen are currently taking the leading roles and are highly unlikely to give them up in the nearest future. This was not really a surprise, since these two currencies nearly always grab more of the market’s attention, but this time Euro’s level of significance was greatly decreased, as the average correlation coefficient between the Euro-crosses did not once exceed 0.3 and was staying near 0.17 most of the time.



There are still some currency pairs where Euro has preserved its topicality, such as EUR/AUD and EUR/NZD, 50-hour rolling correlation between which is consistently around 0.81, but it is more likely a result of strong long-standing correlation of the values of the Oceanian currencies rather than any other reason.
The most vivid example of Euro’s current insignificance in the Forex market is interrelationship among EUR/USD and EUR/CHF currency pairs, correlation of which at some points plunged down to –0.73, the lowest value at least since the beginning of 2012, since we do not have data for earlier dates.

Highlights of the latest Marker Research release on USD.

Full research available here.



The U.S. Dollar has been largely bearish the last five trading days. Most of the data published lately has been only fractionally better than the previous readings or even fell short of the projections, but the public started to get used to results that were overshooting expectations and ran ahead of itself. The markets therefore now have to scale back their excessive optimism that implied early tapering of the current QE programme, which at the moment seems to be an unlikely scenario, being that the unemployment rate rose 0.1% percentage points.



The only last week’s report to allay concerns over the U.S. economy was on non-farm employment change. While being supported by this news the greenback was able to regain 0.6% of its value. Nevertheless, it was insufficient to negate the preceding decline that amounted to 1.2%. In the end the buck finished June 5-11 period with a 1.2% depreciation, winning only against the Australasian currencies that were hit by deteriorating regional data. The U.S. Dollar lost the most relative to the Japanese Yen, namely 3.9%, being that the Bank of Japan did not deliver any new measures in order to achieve its macroeconomic targets, thereby disappointing the markets that are not yet fully convinced the currently performed actions are enough.

Highlights of the latest Marker Research release on CHF.

Full research available here.

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On Jun 13 the Swiss Franc was only a fraction (0.16%) lower than on Jun 7, meaning that presently the currency is largely directionless. Still, within this five-day period it managed to soar 0.9% above the initial level and dip 0.5% below the starting point of 100. We could argue that these deviations were a result of Swiss and Eurozone macroeconomic data published lately, namely, SNB foreign currency reserves, Swiss retail sales, Eurozone industrial production, etc. However, this held true only for the first few days and was not topical at the end.



EUR and CHF, being strongly correlated, started to react inversely to moves in antipodeans, i.e. Australian and New Zealand dollars. The latter have become considerably more active and now to a large extent influence their counterparts, striking examples of which were observed the last two days, when the largest changes in the European currencies coincided with strong fluctuations in AUD and NZD. These were also the cases when EUR and CHF were behaving contrary to the direction implied by the fundamental data that were in fact positive.
All in all we still do not see positive for Switzerland tendency in the exchange rates: the national currency appreciated 2.7% in 20 days and 4.2% in 130 days.

Highlights of the latest Marker Research release on EUR.

Full research available here.



Last week was marked by the Euro performing relatively weak—its index showed depreciation of 0.53%. The currency outperformed only the U.S. dollar (0.95%) and the Canadian dollar (0.86%), while under-performing against all other major currencies, most notably relative to the Japanese Yen (-2.83%). The Euro itself did not move the markets significantly as there was a lack of major news from the region throughout the week, the debasement of the currency was rather a result of events related to its main rivals.



The 17-country bloc currency started moving only on Tuesday, mainly due to the BoJ refraining from intervening in the bond market, increasing uncertainty about its commitment to monetary stimulus. However, the currency was little changed again on Wednesday despite better-than-expected industrial production data release. The Euro lost some value on Thursday amid the U.S. Surprising with better-than-expected economic reports; however, the currency rebounded somewhat later in the day due to hawkish comments from Weidmann. Generally, the weak performance of the currency during the week cannot be explained by a change in fundamentals of the region, but can be attributed to high volatility of sentiments in the market.