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US Dollar, S&P 500 Surge as VIX Retreats, FX Volatility Climbs

US Dollar, S&P 500 Surge as VIX Retreats, FX Volatility Climbs

Rich Dvorak, Analyst

VIX INDEX PULLS BACK BUT FX VOLATILITY REMAINS ELEVATED AS US DOLLAR, S&P 500 INDEX SPIKE

  • Cross-asset volatility measures remain extremely high as global markets weather turbulence from the brewing coronavirus pandemic
  • The S&P 500 Index jumped 6% and the VIX fell from a near-record high as stocks rebounded from their recent rout amid promise of massive monetary and fiscal stimulus measures
  • FX volatility continues to climb as USD price action and the broader US Dollar Index rip higher

A turbulent trading session left the S&P 500 Index 6% higher on Tuesday. Stocks rejoiced headlines that crossed the wires alluding to monumental fiscal stimulus plans from the Trump administration. The White House is reportedly seeking ‘$1 trillion or more’ in stimulus as the deepening coronavirus pandemic wreaks havoc on the US economy.

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CHART OF S&P 500 INDEX OVERLAID WITH VIX INDEX

S&P 500 Index Price Chart SP500 VIX Index

Chart created by @RichDvorakFX with TradingView

As the stock market and investor sentiment recovered, the VIX Index, which reflects expected volatility in the S&P 500 Index over the next 30-days, retreated from its highest close since October 2008 during the global financial crisis.

US 500 Bearish
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 15% -17% 2%
Weekly 19% -22% 1%
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A liquidity bazooka from the Federal Reserve could also explain part of the recovery in equities. This is seeing that the Fed is willing to pump up to $500 billion of cash into the financial system each day via overnight repo operations – even after slashing its benchmark interest rate to zero.

CHART OF CROSS-ASSET VOLATILITY BENCHMARKS: VIX INDEX, GVZ, OVX, VXEEM, TYVIX, FXVIX

VIX Index Price Chart Volatility Cross-Asset

Chart created by @RichDvorakFX with TradingView

Despite the pullback in the VIX Index, or fear-gauge, cross-asset volatility measures remain extraordinarily elevated compared to three months ago. Also, other cross-asset volatility benchmarks like gold volatility (GVZ), oil volatility (OVX) and FX volatility (FXVIX) edged higher on the day.

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CHART OF US DOLLAR INDEX OVERLAID WITH FX VOLATILITY

US Dollar Index Price Chart FX Volatility

Chart created by @RichDvorakFX with TradingView

USD price action, measured by the US Dollar Index (DXY), surged alongside the S&P 500. The DXY Index now trades within reach of the 100.00 handle as the US Dollar soars and FX volatility runs rampant. Above-average readings of currency volatility might keep the US Dollar bid considering the generally positive relationship between FX volatility and the USD. This is likely given the Greenback’s posturing as a safe-haven currency.

Read More: VIX ‘Fear-Gauge’ Hits Crisis Highs Amid Cross-Asset Volatility Explosion

-- 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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