DailyFX

Dollar Range Sets Another Dangerous Low

John Kicklighter

Talking Points:

  • Dollar Range Sets Another Dangerous Low

  • Euro: The Pressure Mounts for the ECB to Ease

  • Australia Dollar Bulls Show Relief in Status Quo RBA

Dollar Range Sets Another Dangerous Low

Extreme volatility readings are easily spotted in all corners of the financial system. Equities in particular have been a big story as activity readings have bounced along multi-year lows recently. However, nowhere are trading conditions as remarkable as the currency market. The FX Volatility Index – a measure of expected movement a month forward – has collapsed to a seven-year low. Realized activity levels have plunged similar depths. Yet, the situation is even more incredible on an individual pairing basis.

ForEURUSD, the 20-day average true range– ameasure of actual price action – has collapsed to a record low since the Euro began trading. Another of the most liquid majors, USDJPY has seen its one-month implied volatility reading hit a record low going back multiple decades. These readings have in turn contributed to the extraordinary circumstances for USDollar. Through Monday’s session, the Index produced a range of a mere 10 points. There are only 6 other instances in the benchmark’s price history where it has covered less than 15 pips in a trading session – and half of those are holidays. These are truly incredible market conditions.

Extremes are not meant to last – that is why they are considered as such. The question is: when do trading conditions attempt the return to ‘normal’ and what will be the circumstances surrounding its rebalance? Excessive use of leverage and a shallow poll of liquidity sow the ground work for a violent deleveraging under adverse conditions – translation: severe risk aversion. That level of speculative interest can revive the greenback’s little-appreciated safe haven status. Yet, the market has shown a resiliency to panic. As we wait for the spark that will ignite risk trends, the dollar’s current will likely be determined by rate expectations. The ISM’s service sector survey this past session helps offset last week’s disappointing 1Q GDP release and gives a nudge on the NFPs debate. Ahead, we have trade data and the Fed’s Stein speaking.

Euro: The Pressure Mounts for the ECB to Ease

The newswires are doing what they can to remind us that there is an ECB rate decision on Thursday. There is already tremendous speculation suggesting the central bank will make another easing move in the near future – though it never seems to be at the next central bank meeting. Recently we have seen ECB President Draghi make the connection between the exchange rate and weak inflation, politicians decry the burden of the high currency and softening of economic data. Monday, these themes were furthered. Attempting to strong-arm monetary policy officials, French Prime Minister Valls remarked that the euro was too high and required further central bank action to ease its strength. On the data front, a slight easing in Eurozone investor sentiment was not as significant as the downgraded growth and inflation forecasts in the EU’s Spring assessment. The latter downgrade from 1.0 to 0.8 percent is particularly important for the central bank’s decision later this week.

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