This week’s flight from risky assets, evident from massive losses in equities, has yet to affect the risk-sensitive Australian dollar. The yen is firmer though, bitcoin has finally broken lower and options traders are paying up for protection against future sterling volatility.
The risk proxy that is the Australian dollar has remained surprisingly calm this week in the face of disastrous falls in equities prices.
In a shocking thirty-hour period spanning Wednesday and Thursday, the closely-watched S&P 500 index of US shares fell 6 percent. To put that into perspective, that’s more than seven times the average daily move (up or down) in the index, and one of the largest falls seen in recent years. This would ordinarily be coupled with a broad sell-off in risk assets or proxies, including those in foreign exchange markets, but that wasn’t the case; the Australian dollar is in fact 0.9 percent higher on the week at 0.712 US dollars and 0.616 euros.
The same is not true of the Japanese yen—usually the first to benefit when financial markets get feisty—which has reacted to drama in stocks, although not to the extent one might imagine. A 1.5 percent gain against the US dollar to ¥112 marks the yen’s best five-day performance since February.
The US dollar as a whole was marginally higher for the week—up 0.2 percent at the end of Friday’s European session—as measured by the Dollar Index (DXY).
A week after Crédit Agricole advised investors to “avoid GBP,” options markets are offering up strong hints that large, perhaps bidirectional moves are on their way for sterling.
As negotiations between the EU and UK move further towards their end, one-month “butterfly” options on the pound, which reflect traders’ expectations for above-average moves, approach ten-month highs.
The next step along the Brexit yellow brick road comes on Wednesday when British Prime Minister Theresa May meets with her EU opposite numbers. A deal might be struck then, as some speculate, or May could be met with further rejection.
The pound is 0.5 percent higher against the dollar this week, at $1.317, and 0.3 percent up on the euro, at €1.141—the pound’s highest weekly closes in several months.
Bitcoin finally woke up on Thursday. A $370, 5.7 percent decline to $6,250 marked the largest move in any direction since September 5th. Bitcoin has been catatonic of late. Digital technology consultants at Juniper Research recently predicted a bitcoin “implosion.”
The threat of a proxy war between the US and Iran in Iraq has pared back some of the recent gains of “risk-on” currencies.
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