FX volatility increases

EUR

The Euro got under renewed selling pressure during the second half of last week. The single currency only finished in the green on a weekly basis against the British Pound and the Canadian Dollar, while losing strongly versus the Japanese Yen, the Australian Dollar and the US Dollar.

After marking the week's high on Wednesday morning at 1.3434, the single currency dropped massively against the US Dollar after the FOMC released the minutes of the January Fed meeting. The minutes said that "many participants" are concerned about "potential costs and risks arising from further asset purchases." Currency traders concluded that the Fed will sooner, rather than later, stop the latest QE stimulus program and the Euro sold off.

Unlike the equity indices the Euro was unable to recover these losses on Friday. This was largely due to the ECB's publication of the results for the early repayments of its long term refinancing operations (LTROs). The ECB said banks will pay €61.1 billion versus expectations for repayments totalling €122.5 billion.  

The beginning of this week saw another wave of heavy Euro selling after the uncertain outcome of the Italian election and the political paralysis brought about by the results. EUR/USD saw its biggest daily drop since January 3rd when the US Dollar responded to the last minute Fiscal Cliff deal. The single currency now trades where it has started the year - close to the 1.30 level.

USD

The US dollar surged to a three-month high against a basket of currencies on Thursday, after minutes from the Federal Reserve's last FOMC meeting showed some policymakers feel the need for the Fed to slow down or stop its bond buying program even if employment does not pick up. The Dollar Index made a new high for the year above 81.50 as the USD gained strongly, especially against Sterling, the Canadian Dollar and the Euro. At the beginning of this week the USD was the target of safe haven capital flows as risk aversion started to increase.

GBP

The world's oldest currency remained under pressure throughout last week. On late Friday evening we then saw a downgrade of the U.K. credit rating to Aa1 from AAA by Moody's Investors Service. In the aftermath of that downgrade, in the former part of this week, Sterling fell to fresh lows when seen against the US dollar - levels last seen in July 2010. It will be interesting to see if Wednesday's GDP numbers for the fourth quarter will be able to turn around the negative sentiment currently surrounding the sterling.

EUR/GBP traded temporarily above 0.88 pence on Monday - a level not seen since October 2011.

Yen

When it comes to the yen the talk at the beginning of the week was all about who is going to be the next governor of the Bank of Japan. It now looks like Prime Minister Shinzo Abe will appoint Haruhiko Kuroda as the new governor. He is said to be in favour of the Japanese's government yen weakening strategy. USD/JPY opened the week with a gap up and traded near a 2 ½ year high. But the market has long-known the future governor of the Bank of Japan will be more prone to easing.  So the effect did not last very long. With investor risk aversion starting to kick in late Monday USD/JPY sold off massively to lose more than 300 pips as investors took profits in the short yen trade. It was the biggest drop of USD/JPY in almost three years.

CAD

The Canadian Dollar came under significant pressure again on Friday after the publication of weaker than expected Canadian retail sales. The month over month figure for December came in at -2.1%, much lower than the expectations of -0.3%. Retail sales ex-Auto was weaker than expected as well, underlining the recent signs of weakness in the Canadian Economy. USD/CAD rose to a fresh year high at 1.0257 after the data, continuing the bull trend of the recent weeks. From a technical perspective the path of least resistance is up, a re-test of the 2012 high at 1.0447 during the upcoming weeks seems likely as long as key support at 1.01 holds.

Gold

Gold was trading in quite a volatile fashion as well last week. It lost almost 3% on Wednesday before recovering towards the end of the week. The metal remains below key short term resistance in the 1626 $/ounce area but this level could be tested as some investors are beginning to shift their capital out of equities and back into the shiny metal with the retreat of global equity markets which started this Monday.