The subject of low volatility on the currency market, but not only, has already been raised many times. Nevertheless, even in such an environment there are events that may able to increase such volatility. Such events have recently appeared on the USD/CAD and AUD/USD pairs, and the market is also awaiting today's decision of the European Central Bank on interest rates. We will also look at the expectations for the EUR/USD exchange rate.
Anyone who follows the events on the currency market yesterday certainly noticed what was happening on the USD/CAD pair, where there was definitely more volatility and greater trend movement as a consequence of the Bank of Canada statement. The Bank of Canada has decided to leave interest rates unchanged. The main interest rate will still be 1.75 percent, which is the highest level since the end of 2008. This decision was in line with market expectations and consensus.
What has changed in relation to the previous decision and statement is the increased concern about economic growth. It was announced that the Bank will closely monitor the economy to see if the recent slowdown in growth is more persistent than expected. In addition, the statement abandoned the phrase that the current interest rates are appropriate. Therefore, the market probability of interest rate cuts in the future may have increased. According to the interest rate market it is 50 percent chances of rate cut by mid-year and full rate cut by December.
As a consequence, the USD/CAD exchange rate began to rise strongly, breaking resistance in the 1.3100 area and reached the highest level since December 2019.
In turn, we observe a completely different situation in Australia and the AUD/USD pair, where the Australian dollar is the leader this morning. It seems that the strengthening of AUD may have been influenced by labor market data released tonight. The unemployment rate in Australia unexpectedly fell from 5.2 percent to 5.1 percent, which is the lowest level in nine months. This in turn may have reduced expectations regarding interest rate cuts as early as February. The chances of lowering interest rates have fallen by half to 25 percent after publication of the data.
Meanwhile, today the market is waiting for the decision of the European Central Bank. According to market consensus, no important decisions are to be made at today's meeting. Interest rates and asset purchase program are expected to remain unchanged. According to the data from the currency options market, the volatility that may potentially occur during today's event does not exceed 40 pips. In turn, the demand between the CALL and PUT options indicates greater interest in the former, which in turn may mean a greater likelihood of an increase in the EUR/USD exchange rate than its decrease - according to the situation on the options market.
ECB decision will be published today at 13:45 and the press conference will be held at 14:30.
Daniel Kostecki, chief analyst at Conotoxia Ltd., a company from the group to which Cinkciarz.pl Sp. z o.o.
The above comment is not a recommendation within the meaning of the Regulation of the Minister of Finance of October 19, 2005. It has been prepared for information purposes and should not be the basis for making investment decisions. Neither the author of the study nor Conotoxia Ltd. are responsible for investment decisions made on the basis of the information contained in this commentary. Copying or reproduction of this document without the written permission of Conotoxia Ltd. is prohibited.
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