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Sustained Surge in FX Volatility Goes Beyond Isolated Event Risk

Sustained Surge in FX Volatility Goes Beyond Isolated Event Risk

2014-10-14 08:00:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- Inflation updates from the UK, China, and the Euro-Zone.

- German ZEW figures on Tuesday – will they confirm recession fears?

- US consumption, confidence data round out the week.

Volatility growth has started to become self-sustaining - independent of any one event risk on a day-to-day basis. This is a further encouraging step towards normalization of market activity and likely a correction in the capital markets as the Fed seeks to wind down QE. Continued gains in risk assets like the S&P 500 over the past five-plus years is much of a reflection of complacency, dependency on low volatility, record usage of capital market leverage and fading participation as genuine optimism. That represents a very unstable backdrop. For traders, that is exciting potential.

Rate Hike Probabilities / Basis-Points Expectations

Sustained Surge in FX Volatility Goes Beyond Isolated Event Risk

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. See all of this week’s “highimportance events.

10/14 Tuesday // 08:30 GMT: GBP Consumer Price Index (SEP)

Annual inflation is expected to fall for the third consecutive month, indicating a potential loss of momentum for the UK economy. While the trade deficit narrowed in August by £1.3 billion, a two-year PPI downtrend combined with uncertainty pertaining to the degree of slack in the labor market has led to a cautious BoE assessment of future inflation. As a result at the October 8th MPC meeting the BOE voted to keep the bank rate at 0.5% and may consider policy timing changes in the future if the price level continues to weaken. Under current expectations the GBP/USD retains its bearish momentum.

10/14Tuesday // 09:00 GMT: EUR German ZEW Survey (OCT)

The ZEW Indicator of Economic Sentiment recorded a 1.7 point loss in September and is expected to decline more drastically (-6.9) in October. The surveyed figure of zero indicates that the percent of economists who believe the German economy will deteriorate in the next 6 months out is now equal to those who believe it will improve. This balanced, rather than positive, reading should come without shock given the recent weak performance of headline indicators, a fall in the DAX, and continued risk in the Eurozone.

10/15 Wednesday // 01:30 GMT: CNY Consumer Price Index (SEP)

The Chinese Consumer Price Index headline reading is expected to come in at +1.7% versus a prior +2.0% by analyst estimates. The prior reading of +2.0% is well below the average Chinese CPI of +3.4%. According to economic release data provided by Bloomberg, the Chinese economy is expected to expand +7.2% in Q3’14 with exports improving slightly in September. Both of these factors could have strong effects on CPI readings for September.

10/15 Wednesday // 12:30 GMT: USD Advance Retail Sales (SEP)

US Advance Retail Sales for the month of September is expected to come in at -0.1% versus a prior reading of +0.6%. Forecasters are expecting a small contraction might be seen as contrarian to the current consensus of a strong pace of consumption and growth for Q314. The prior months reading is the highest reading achieved by Advance Retail Sales since the March reading of +1.5%. US auto sales have accounted for approximately half of the September reading, which could be the source of a contractionary estimate by analysts.

10/17 Friday // 13:55 GMT: USD U. of Michigan Confidence (OCT P)

The preliminary October US U. of Michigan Confidence reading is expected to come in just short of the prior reading of 84.6 at 84.0. The prior reading of 84.6 was a 14-month high, which fell just short of the all-time high measured at 85.1. Consumer optimism has been increasing due to lower prices and a strengthening dollar in the international arena. US consumer optimism will add to the trend of a strengthening US economy and the performance of US retail businesses.

Sustained Surge in FX Volatility Goes Beyond Isolated Event Risk

--- Written by Christopher Vecchio, Currency Strategist, Tyler Amend, DailyFX Research and Kara Dailey, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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