The Morning Commentary: Volatility Strikes Back

Foreign Exchange - Morning Commentary
Volatility Strikes Back
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Swings in the foreign exchange markets have returned with G10 currencies trading in the widest ranges seen in 5-10 years.  As an example, the low to high range for EURUSD in July 2020 was more than twice as wide as it was in July 2019.  Similar dynamics are also at work in the emerging markets with those currencies seeing their biggest moves since 2018.

Some of the key drivers of the wide monthly swings over the past 6 months include COVID-19 macro shocks, swings in oil prices and equity markets risk-on/risk-off. 

In the EM, the biggest movers include USDMXN (Mexican peso), USDBRL (Brazilian real), and USDRUB (Russian ruble).  These moves represent the vulnerabilities that LatAm has to COVID-19 shocks amid challenging macro-economic conditions.  The ruble, of course, suffered losses due to the collapse in oil prices and oil demand. 

In the developed markets, NOK (Norwegian krone) crosses were the biggest movers.  Similar to EM currencies, commodity shocks and equity volatility were big drivers of price action. 

More recently, USD weakness has been a key trigger of higher realized volatility.  EURUSD is a good example of this as it has broken out of its multi-year long range.  The Scandies (NOK and SEK) are also good illustrations as they have the largest absolute swing over the past month. 

Looking ahead, the expectation remains for volatility to increase due to the US elections and continued deterioration in the US-China relationship.  Historically speaking, the pattern around US presidential elections has been for volatility to remain elevated from Election Day through the inauguration.  Of course there also remains the Phase 1 deal between the US and China.  Both countries are expected to meet on or around August 15 to discuss progress.  With the impending election (tough on China plays well politically), a scheduled visit of a high ranking US official to Taiwan and tensions over Chinese tech companies, trade/geopolitical risks remain high. 
  • The US non-farm payroll jobs report beat estimates at 1.76 million against expectations for a 1.48 million print.  While this month’s report did beat estimates it was a significant decline from last month’s revised 4.79 million print, realizing the jobs slowdown many were expecting.  The unemployment rate came in at 10.2% against consensus for 10.6%.  Despite large job gains over the past 3 months, employment still remains ~13 million jobs below pre-COVID-19 levels.  Looking forward, higher frequency indicators suggest that next month’s jobs report should show a further slowdown in job creation.
  • Phase 4 stimulus talks continue to face gridlock with the tone turning so badly that it is unclear whether or not talks will continue today.  President Trump is considering taking executive action to address the eviction moratorium and the payroll tax cut.  It should be noted that Congress controls the purse strings so the impact of any executive action will be limited without Congressional approval.  
  • The Trump administration has banned US residents from doing business with TikTok or ByteDance starting in 45 days.  A similar executive order was signed for WeChat although other transactions involving Tencent (owner of WeChat) were not included.  The US also took steps to tighten disclosure requirements for Chinese companies listed on US exchanges and is reportedly poised to impose sanctions on Chinese officials, including Hong Kong Chief Executive Carrie Lam, for their role in the Hong Kong crackdown.  For China’s part, the country has yet to take any concrete action but it is expected to retaliate in the coming days.  
  • Canada’s jobs report beat estimates at 418.5K versus consensus for 380.0K.  The majority of job gains came from part-time jobs with that segment rising 345.3K.  The unemployment rate also fell to 10.9% from 12.3%.
  • Germany posted better than expected industrial production numbers with June’s MoM print rising 8.9% against expectations for an 8.2% rise.       
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