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US Dollar Stages Rebound as VIX ‘Fear-Gauge’ Climbs, Dow Slumps

US Dollar Stages Rebound as VIX ‘Fear-Gauge’ Climbs, Dow Slumps

2020-06-18 14:45:00
Rich Dvorak, Analyst
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US DOLLAR OUTLOOK: USD PRICE ACTION SUPPORTED BY RISING VOLATILITY & FADING RISK APPETITE AS STOCKS START TO STUMBLE

  • US Dollar has gained about 1.5% on balance since the latest bottom notched by the DXY Index
  • Stock market volatility attempts to trend higher judging by the S&P 500 VIX Index
  • The Dow Jones has dropped roughly 4.5% from its month-to-date top as risk appetite fades

The US Dollar continues to show encouraging signs that a potential bottoming attempt might be in play. A modest 1.5% rebound set forth by the DXY Index since its month-to-date low has followed the steep 4.5% drop recorded by the broader US Dollar between 25 May and 10 June.

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US DOLLAR & VIX INDEX PRICE CHART: 4-HOUR TIME FRAME (04 MAY TO 17 JUN 2020)

DXY Index US Dollar Price Chart VIX Fear Gauge Volatility

Chart created by @RichDvorakFX with TradingView

USD price action ricocheting higher seems to correspond with volatility on the rise again. As indicated by the VIX Index, this popular Wall Street ‘fear-gauge’ shows expected stock market volatility has snapped back to multi-week highs amid deteriorating risk appetite.

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At the same time, with market sentiment beginning to wane from its arguably euphoric state, the US Dollar, a popular safe-haven currency, has started to see a return of demand and buying pressure. Cautious commentary from Fed Chair Powell on the US jobs market, in addition to rising coronavirus second wave risk, appear to have largely catalyzed the latest shift in investor sentiment.

US DOLLAR & DOW JONES PRICE CHART: DAILY TIME FRAME (28 FEB TO 17 JUN 2020)

USD Price Chart US Dollar Dow Jones Industrial Average Relationship

Chart created by @RichDvorakFX with TradingView

This theme is also reflected by recent DJI price action. After slipping more than 4% from its 08 June close, the Dow Jones Industrial Average is currently trading slightly above the 26,000 level. The popular stock market benchmark now fluctuates back between its medium-term (50-day) and long-term (200-day) simple moving averages as stocks start to consolidate after staging an incredible rebound from the mid-March bottom.

Wall Street BULLISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -13% -6% -9%
Weekly -33% 15% -12%
What does it mean for price action?
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That said, the direction of implied volatility, such as the VIX Index, in addition to demand for other safe-haven assets, like the USD, could serve as strong bellwethers to where the Dow Jones heads next. Perhaps another higher low on the VIX Index, or similarly, a higher high on the broader US Dollar, might foreshadow a larger breakdown in the Dow, particularly considering that stocks face peril as a day of reckoning looms.

Keep Reading – US Dollar Rises from the Dead as VIX Soars, Stocks Drop Sharply

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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