Thursday, 22 November 2012

Dollar/VIX correlation

In Wednesday's edition of Capital Account, Chris Cole of Artemis Vega Fund highlighted a very interesting correlation, that of market volatility and the US Dollar. The key issue is that a stronger dollar - more often that not, would be indicative of higher market volatility.

As is usually the case, Capital Account is well worth watching, especially this episode, hosted by Lauren Lyster

Okay, now you've seen the show (I hope) lets take an overview of the USD, with VIX (overlaid in charts 1 and 3)

USD/VIX, daily

USD, weekly

USD/VIX, monthly


Starting with the daily chart, I want to particularly highlight the issue of when I believe wave'1 did indeed begin - October 18'th. That was also where the Dollar began a new up cycle, and the VIX also made a leap to the upside.

Interestingly, the VIX is arguably now lagging behind the dollar. Yes, the $ has been ticking lower in recent days, but I'm guessing that it is just a minor wave'2 retracement (with a corresponding wave'2 bounce in equities).

The big monthly historic chart is the most illustrative of all.

You can see a very broad positive USD/VIX correlation in this chart, that spans the last 15 years. One notable feature is where the VIX floored in early 2007, which was a full year before the USD floored. Once the dollar did finally turn upward in 2008, the VIX accelerated, and eventually went nuclear, rising (briefly) into the 80s.

What next for USD/VIX ?

As things are, I'm seeking a continued very minor decline in the USD next week, maybe even into the mid 79s, but then a new wave higher, with USD 83/84, certainly by late January 2013, if that is correct, that would surely mean Sp'1200s, with VIX in the mid 20s, if not the 30s.

Doomer bears need strong $

Those seeking lower equities need a higher $, and that should also translate to a much higher VIX

The broader trend on the $ - at least on the monthly charts is still upward, so equity bears do have a chance in the mid-term. However, if we break into the USD 77s, that would wreck the trend, and be suggestive of another wave of higher prices across most asset classes - most especially in equities and the precious metals.

All paper currencies are of course forever losing value each year - not least with the increasing amounts of QE (aka, insane money printing) in recent years. What still seems likely across the longer term (3-7 years) is the Euro will fail first, and the dollar will indeed be the last piece of dirty paper to catch fire. The wild card is the Japanese Yen, where - as quite a few are noting, the debt/GDP ratio is beyond nightmarish levels, and a currency/bond market collapse is viable at almost any time.

*The Vega Fund is part of the Artemis group that came up with this classic VIX/Equity market historical overview. Enjoy!

For related details see: Artemis Research

back later in the day...where I will probably look at WTIC Oil.