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VIX: Volatility Hints at Next Move in Gold, US Dollar & Stocks

VIX: Volatility Hints at Next Move in Gold, US Dollar & Stocks

2019-08-30 18:46:00
Rich Dvorak, Analyst
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VOLATILITY SET TO DRIVE GOLD PRICE, US DOLLAR & STOCK MARKET

  • The VIX Index seems precariously set for a major break and will likely foreshadow the next turn in gold prices and the stock market
  • Forex volatility has surged recently and likely helped propel the US Dollar to fresh highs
  • Check out these Top Trading Lessons to learn from and avoid common mistakes made by traders

Two weeks ago, we noted how gold prices and volatility dropped while stocks climbed as US-China trade war jitters ebbed. The same theme appears to have repeated itself over the last 5 trading days with markets whipsawing in response to the latest US-China trade war rhetoric flip-flopping once again. As a result, traders likely find themselves lacking conviction over the market’s next direction while the dust settles in response to recent fundamental developments. Nevertheless, the VIX Index and other various measures of volatility stand to serve as a bellwether to the next move in gold, the US Dollar and stocks.

VIX INDEX PRICE CHART: DAILY TIME FRAME (AUGUST 27, 2018 TO AUGUST 30, 2019)

VIX Index Price Chart Volatility Technical Analysis

Chart created by @RichDvorakFX with TradingView

On balance, the recent slump in the VIX Index signals risk appetite creeping back into the stock market. The choppy reversals in volatility over the last month have largely been in response to the latest US-China trade war headlines which have shifted back and forth between tit-for-tat tariff threats followed by reports that tensions are cooling as talks resume.

Yet, the VIX Index may very well pivot back higher with investors’ favorite fear-gauge hovering near technical confluence around 17.5 which could keep volatility elevated as market uncertainty lingers. This stands to keep a lid in potential stock market gains moving forward, whereas further evidence of the VIX Index drifting lower could accompany a breakout in the S&P 500 Index from its turbulent trading range throughout August.

GOLD PRICE VOLATILIY INDEX PRICE CHART: DAILY TIME FRAME (SEPTEMBER 24, 2018 TO AUGUST 30, 2019)

GVZ Gold Price Volatility Index Chart

Chart created by @RichDvorakFX with TradingView

The past week’s widespread drop in volatility was most observable in GVZ – Cboe’s 30-day implied gold price volatility index. In contrast to the typical inverse relationship between volatility and the price of risk assets (such as stocks in the S&P 500 Index), spot gold prices tend to hold a strong positive correlation with volatility. In turn, the steep slide in GVZ over the last few trading sessions has so far served well at foreshadowing recent sluggishness in the price of gold as the breakout in XAUUSD stalls. If fundamental winds shift back in favor of risk aversion, however, that could bode well for volatility and gold prices.

US DOLLAR & CURRENCY VOLATILITY INDEX PRICE CHART: DAILY TIME FRAME (AUGUST 01, 2018 TO AUGUST 30, 2019)

DXY Index US Dollar Price Chart and Currency Volatility

Chart created by @RichDvorakFX with TradingView

Turning to US Dollar price action, we find that the greenback has climbed to new multi-year highs alongside a sharp rise in forex volatility (measured using an equally-weighted index of Cboe’s 30-day implied volatility readings on the Euro, British Pound and Japanese Yen). The US Dollar has largely enjoyed a boost from America’s relatively robust economy – most recently evidenced by healthy GDP data – in addition to prevailing safe-haven demand. With the Eurozone weakening further and Brexit crippling the UK, FXVIX may churn higher which may provide a tailwind for further US Dollar upside – particularly if the correlation between the US Dollar and forex volatility continues to grow more positive.

-- Written by Rich Dvorak, Junior 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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