Volatility was a key feature during Friday, especially during the European session ahead of the US open. The Australian dollar once again came under attack in Asia with already very fragile sentiment compounded by further jawboning from the central bank. Board member Ridout expressed her own opinion that the currency had not fallen far enough and that 0.80 would be fair value for the currency. AUD/USD inevitably fell sharply with fresh four-year lows below 0.87.
Emerging-market concerns in general remained an important focus during the day. There were further reports of credit-related stresses within the Chinese economy and few were prepared to tough it out ahead of the weekend and lunar new-year period late this month.
After a very sharp peso fall on Thursday, the Argentine government announced that capital controls would be abandoned on Monday which added to a high degree of unease surrounding emerging markets, especially in Latin America. The impact was magnified by falling global equity markets with the Spanish bourse particularly badly hit.
The overall contagion effect was significant with the yen and Swiss franc gaining strong support. USD/JPY fell sharply again with lows around 102 as USD/CHF fell to near 0.89.
Sterling was finally brought back to earth following a week of increasingly contentious advances against the dollar. There was heavy Sterling selling against the Euro around the London fix as EUR/GBP moved towards 0.83 and GBP/USD retreated from 2-year highs above 1.6650.
The Euro gained important support from Sterling vulnerability and also continued to gain some defensive support from the rout in emerging markets. EUR/USD broke above the 1.37 level for a peak near 1.3740 in very spiky trading before a fresh retreat.
The dollar was also hampered by a further decline in US Treasury bond yields as benchmark rates dipped towards 2.70% with German yields also falling sharply. The US currency did recover later in the session given its premier role as global safe-haven and EUR/USD failed to hold the 1.3700 level.
Sterling’s downturn accelerated early in New York with further comments from Bank of England Governor Carney that monetary policy would remain extremely loose and that there was no prospect of a short-term increase in interest rates. The impact was compounded by comments that Sterling strength will hamper export growth. GBP/USD registered further sharp losses with lows below 1.6500 as GBP/JPY fell by 300 basis points to below 169.0.