Volatility Rules!

Last week lived up to expectations in just about every way!

It was almost a perfect storm between the ECB’s move and the Non-Farm Payrolls data. Volatility returned following the summer slumber and markets moved violently as the news was digested.

For the first time in quite some time we saw moves in currencies that weren’t driven by risk-on/risk-off scenarios.

While the market approached the ECB's announcement with scepticism, the sharp decline in Spanish and Italian 10 year bond yields indicate that the central bank has achieved their goal (at least in the near term) of effectively convincing investors to buy the bonds of heavily indebted Eurozone countries.  As long as Spanish and Italian bond yields continue to fall, the risk of the euro crisis deepening declines with it.

That all sounds great and the Euro responded by breaking through resistance.

The non-farm payrolls report was a reality check for the U.S. dollar.  With payrolls rising a mere 96k last month compared to a downwardly revised increase of 141k in July, QE3 is a done deal even with the unemployment rate dropping to 8.1%. Economists were looking for job growth to slow but considering Thursday's better than expected economic data 96k was a major shock. Job growth was also revised lower in June and July, highlighting the overall weakness in the labour market.

The dollar fell on the back of the data giving a further push mainly to the Euro and GBP.

The coming week will continue the volatility theme with a number of key events.

Whilst last week was undoubtedly a good week for the single currency but there is still a long way to go. My blog of 6^th September outlines a number of battles still to be fought.

The Euro is trading above 1.28 and the GBP above 1.60 levels not seen for quite some time and technically both are in overbought territory.

The week starts off with Chinese Industrial Production and inflation data. The German Constitutional Court's ruling on Europe's rescue fund is announced on Tuesday. We then see the FOMC policy announcement on Wednesday and the week ends with the U.S. retail sales report and the beginning of the EU Finance Ministers meeting on Friday. 

Risk currencies performed extremely well despite the disappointing U.S. non-farm payrolls number mainly due to the monetary support from the ECB.  Most major currency pairs have broken out of their recent ranges and as long as the German Constitutional Court approves the rescue fund and the Federal Reserve eases, the rallies could continue.

It should be noted that the Bundesbank President, Jens Weidmann was the sole dissenting voice at the CB meeting on Thursday and Frau Merkel, speaking in Spain, continued to voice her dislike for the plan.

Germany may still be able to scupper the plan but the effective cornering of the Bundesbank by making the bond purchases dependent upon ESM conditionality has seen Sr. Draghi score a major victory.

Whatever happens this week, tight stops and nerves of steel will be required.