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Currencies began the week in sluggish fashion with the majors trading within familiar narrow bands, a trend which may ironically have allowed them to break out of their previously rigid correlations with equity markets.
The euro was up 0.1 per cent against the dollar at $1.2725 after a weekend that saw the Greek parliament approve its 2013 austerity budget and ahead of a week which sees Greece battling to avert what is being termed an “accidental default” when a €5bn debt repayment comes due on Friday.
Citigroup strategists described the euro’s level against the dollar as “no-man’s-land” but it is noteworthy that CFTC data released Friday showed that speculators resumed their long dollar positions for the first time since mid-September.
Rabobank’s Jane Foley argued the repositioning confirmed “the overall environment has become more risk adverse and demand for safe haven assets has increased.”
The single currency was also up 0.2 per cent against sterling at £0.8010 with the pound flat against the dollar at $1.5898 as it failed to gain any momentum from last week’s announcement that the Bank of England will transfer some £35bn of surpluses accrued on gilts purchased as part of the Bank’s money-printing operations to the UK Treasury.
Even the Japanese yen failed to provide any real excitement as it lost 0.1 per cent against the euro to Y100.93 and gained marginally against the dollar to Y79.41 as the Japanese economy recorded an, admittedly expected, annualised drop of 3.5 per cent between July and September, the steepest decline since the earthquake-hit first quarter of 2011.
The Australian dollar was one of the few real movers, gaining 0.4 per cent against both the US dollar, to $1.0433, and the yen, to Y82.83 on the back of strong Australian credit and Chinese economic data -- China notched up its biggest trade surplus in nearly four years in October.
One interesting side effect of the current range bound nature of the major currencies is falling correlation between markets -- they don’t appear correlated simply because they are not moving.
As RBC’s Adam Cole said: “US equity prices have traded a range 2 per cent either side of their average level since early September and the same applies to most G10 currency pairs.”
That, adds Cole has lead to a majority of G10 currency pairs being uncorrelated with equity returns over the past three months -- which is an obvious shift away from the recent domination of the risk-on, risk-off paradigm.
However, such shifts away from the pattern have occurred before and there is little confidence in the market that it can be maintained as volatility picks back up.
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