The year of the butterfly in currencies

The currency markets 2012 can be viewed as the year of the butterfly. A look at the performance of the DXY dollar index showed relatively flat performance for the first four month and flat performance in the last quarter which represented the wings. The middle of the year was marked by a flight to the dollar in response to renewed problems with Euro-zone crisis. The dollar reversed this strengthened on the renewed commitment of the ECB President Draghi to do whatever it takes to provide liquidity to the bond markets. An expectation that Fed Chairman Bernanke would actively extend monetary easing through a QE3 also brought the dollar back down to its ranges seen earlier in the year. For currencies, this was the classic risk-on and risk-off with the dollar rallying on sovereign risk only to reverse once policy-makers offered a liquidity solution.  

 Our butterfly pattern would have made the “Rip Van Winkle” test or “Sleep-Test” operative. An investor who went to sleep at the beginning of 2012 would not have noted a significant change in dollar performance when they woke-up at the end of the year. The exception to this relative stability year over year was the significant sell-off in the yen which has hit 28 month lows. Here, someone would have awakened to a new yen world.