Aussie fixing drops 1.41% below 0.7000 as US data jolts markets

The Australian dollar gave back its climb above 0.7000. The AUD/USD reference rate from the European Central Bank (ECB) fell 1.41% to 0.6911 at the 15 October fixing, down from 0.7010 on 14 October, on a day when investingLive reported that markets were still digesting the US CPI shock and equities stayed under pressure.

The news in our data does not give a specific Australian reason for the drop, so we will not guess one. The rest of the dollar picture was mixed. EUR/USD rose 0.12% to 1.1208 and USD/CHF fell 0.38%, and Investing.com reports the dollar retreated from 18-month peaks even though US producer prices ran hot. According to investingLive, September PPI came in at 6.3% against 5.3% expected, and US retail sales rose 0.8% against a 0.3% estimate. Our sister site covers that dollar story in why the dollar eased despite hot US PPI and retail sales.

What is volatility?

Volatility is how much, and how fast, a price moves. A calm pair moves a little each day. A volatile pair makes big jumps up or down.

Volatility says nothing about direction. A 1% fall and a 1% rise are the same amount of volatility. One simple way to measure it is to take the daily percentage changes, ignore the plus or minus sign, and average them. That gives the average absolute daily change.

Today's fixings show why it matters. A pair that usually moves 0.1% a day and suddenly moves 1.4% is behaving very differently from normal.

A worked example

Here are the last five ECB fixings for two pairs, with the daily change worked out from the pack's numbers.

Step 1: drop the signs and add the four changes.

• AUD/USD: 0.10 + 0.06 + 0.46 + 1.41 = 2.03
• EUR/USD: 0.22 + 0.06 + 0.06 + 0.12 = 0.46

Step 2: divide by four.

• AUD/USD: 2.03 / 4 = about 0.51% per day
• EUR/USD: 0.46 / 4 = about 0.12% per day

Over this week the Aussie was roughly four times as volatile as the euro. Before today, its average move over the first three changes was (0.10 + 0.06 + 0.46) / 3 = about 0.21%. Today's 1.41% was close to seven times that.

Now turn it into money. A pip is the fourth decimal place in these pairs. AUD/USD fell from 0.7010 to 0.6911, which is 0.0099, or 99 pips. On a standard position of 100,000 Australian dollars, each pip is worth 10 US dollars, so the move equals 99 × $10 = $990. EUR/USD moved from 1.1195 to 1.1208, or 13 pips. On 100,000 euros that is 13 × $10 = $130.

These are daily official fixings, not live quotes. Prices between fixings may have swung further.

Why it matters for new traders

• Risk changes with volatility. The same position size carried about $990 of swing in AUD/USD but only $130 in EUR/USD. Many traders size positions smaller in a more volatile pair.
• Volatility clusters around news. investingLive warned before the releases that PPI and retail sales posed fresh risks for markets. Busy data days often bring bigger moves.
• Quiet weeks can end suddenly. AUD/USD moved less than 0.5% a day for three sessions, then fell 1.41% in one.

You can compare the two pairs on the AUD/USD chart and the EUR/USD chart.

Key terms

• Volatility: how much and how fast a price moves, in either direction.
• Average absolute daily change: the mean of daily percentage moves with signs removed.
• Pip: the fourth decimal place in most currency pairs, such as 0.0001 in AUD/USD.
• ECB fixing: the official reference rate the European Central Bank publishes once per business day.
• PPI (Producer Price Index): a measure of prices businesses receive for goods and services.