A good old-fashioned bout of risk aversion saw the commodity currencies significantly underperform on Friday.
After a prolonged period of low volatility since the days following the Brexit vote, markets have awoken to the fact that the days of further monetary stimulus might be numbered.
The ECB’s lack of commitment to provide further stimulus got the ball rolling on Thursday night, but that followed simmering thoughts over recent weeks that the Bank of Japan’s options are limited.
More hawkish Fed-speak has added to the mix and the combination sent US equities tumbling on Friday, with the S&P500 down 2.5% and the VIX index up 40% to 17.5, its highest level since late-June.
Boston Fed President Rosenberg’s comments seemed to get more attention than deserved, a reflection of the jittery state of markets after the ECB’s disappointment. His comments put him in the hawkish camp of the divided Fed, stating that “…a failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery”.
The USD was the strongest of the major currencies on Friday, although the USD TWI major currency index rose by a fairly modest 0.5% overall, reflecting only small gains (circa 0.2%) against the Yen, EUR and GBP.
The largest currency movements were largely confined to the commodity currencies, reflecting the surge in the VIX and a chunky fall in commodity prices. Bloomberg’s commodity price index fell 1.3%, led by a circa 4% fall in oil prices.
The NZD closed down 1% to around 0.7325, unwinding its gains over the previous couple of days.
The AUD fell by a larger 1.3% to 0.7540, meaning a weekly close for the NZD/AUD above the 0.97 handle.
The increased market volatility could be a sign of things to come, as Northern Hemisphere investors and traders return from their summer holidays.
There’s nothing much on the economic calendar over the next 24 hours, but the market will be closely watching Fed speakers Lockhart, Kashkari and Brainard overnight. The Fed speaker blackout period then follows, ahead of the September 22 rate decision.
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