Markets took a one-two punch to the chin yesterday, when both of the world’s largest economic trading blocs released softer-than-expected numbers. According to results dropped during the European session, common currency-area gross domestic product expanded by 0.2% during the first quarter – less than half the rate forecast, and effectively flat against the last three months of 2013. Numbers broadcast before the North American open showed that factories in the United States shipped 0.6% less in April than in March, while inflation rose slightly more than expected.
Taken together, these results ratcheted up the pressure on central bankers, encouraging the Federal Reserve and the European Central Bank to keep monetary stimulus flowing. Government debt yields were crushed in the aftermath, driving a sharp spike in currency market volatility as traders jostled for position on a freshly tilted playing field.
Euros are trading hands just above a two and a half month low while the dollar struggles for traction on a trade-weighted basis. Safe-haven buying is pushing the Japanese yen higher, adding to the momentum gained when the country posted surprisingly positive spending numbers earlier in the week. Sterling is also looking shiny, pushing through yesterday’s high as the Bank of England continues to make noises about monetary tightening.
A weaker global backdrop failed to dent enthusiasm for the Canadian dollar however, which moved a few millimetres forward after domestic factory purchase orders increased by 0.4% in March – continuing an unbroken six-month string of weak but positive growth. Commodity prices are providing some support, but with most of the crude oil action occurring against the European Brent benchmark rather than North American West Texas Intermediate, the impact on CAD positions has been extremely limited.
With growth stuttering, yields could go lower – but we would caution that this won’t last forever. Central banks will eventually begin to reduce stimulus, and investors will certainly try to pre-empt them. Current trading ranges are unlikely to persist through the summer months, meaning that participants should begin building strategies to protect themselves in the event that the normal tumult returns to the markets.
That being said, going into next week, the data calendar looks uncomfortably bare. There are few obvious catalysts for volatility, other than the release of April Federal Reserve meeting minutes on Wednesday.
For currency traders, this is worrisome, meaning that sharp moves could occur without warning or preamble. But for corporate hedgers, this represents an opportunity – when markets are illiquid and vulnerable, automated currency orders can deliver substantial value. By automatically triggering at pre-set spot, forward, or option market levels, they can allow businesses to harness volatility without requiring constant attention. Talk to your trading teams about order mechanisms, and remember – fortune favours the prepared.
Further reading:Â US data looking good, so why did the dollar drop? 5 reasons
