Wednesday, December 2, 2015

Fun and games in the Euro-dollar yesterday | Mandelbrot stays safe

Yesterday was indeed a topsy-turvy day for the Single Currency (Euro against the U.S. dollar), or the EURUSD currency pair.

This instrument has suffered significant falls in the past few weeks on the back of strong (and growing) divergence between the monetary policies of the Eurozone and the U. S. The number of Forex bets that it will continue to go lower is large, and this has created a situation where market participants are on edge, on the fear of a sudden reversal, for whatever reason. Yesterday was also the day before the latest ECB monetary policy statement and press conference (statement will be at 13:30 GMT today, with press conference to follow), when nerves are also likely to be somewhat frayed.

The fun and games yesterday started with the flash Harmonised Index of Consumer Prices (HICP) for the Eurozone as a whole, which showed that inflation was, once again, lower than had been expected. This is a negative for the Euro and the market reacted accordingly (see chart).

Then we had the U.S. ADP jobs report, which came in better than hoped for, giving rise to some short-term multi-directional volatility, with a following bias towards a further strengthening dollar.

Janet Yellen’s speech at the Economics Club in Washington simply reinforced the view that interest rate rises are coming this month, and the dollar continued to firm on that.

In the middle of the afternoon, New York time, however, a Bloomberg headline which said “ECB said to present largely unchanged macroeconomic forecasts” got the market to thinking that Mario Draghi may not, after all, announce further QE and / or deposit rate decreases at the meeting today. This led to a total reversal of the tendency for the previous part of the day, and a somewhat dramatic turnaround in the fortunes of the EURUSD pair.

Mandelbrot stays safe

The OmiCronFX Mandelbrot algorithmic routine is designed, on the back of exhaustive research which it also facilitates, to dodge as much as possible the effects of the abnormal volatility described above. This worked very well yesterday.

Discretion, it is often said, is the better part of valour.

Knowing when to be discreet is the important thing.

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