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Market Minutes: Volatility Plunges; USD Rangebound as US Yields Steady; US Inflation Data on Thursday

Market Minutes: Volatility Plunges; USD Rangebound as US Yields Steady; US Inflation Data on Thursday

Christopher Vecchio, CFA, Senior Strategist
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Market Minutes Overview:

  • Measured to a base on March 8, exactly three months ago, the VIX, OVX, MOVE, and GVZ have all contracted by double digits; the VIX and MOVE are off by more than -30% each.
  • The US Dollar that is lacking a significant driver at the moment. US Treasury yields have been moving sideways for the better part of two months, and it now appears that inflation expectations have started to settle in as well.
  • Accelerating price pressures still may not do much to move the needle for the FOMC in the wake of the May US non-farm payrolls report. That said, it appears that taper talk is about to intensify as inflation readings peak.

Is Anyone Out There?

Markets are quiet. Perhaps too quiet. Stocks are gyrating near their highs with some technical evidence beginning to accumulate on lower timeframes that bearish momentum is starting to build. But with several inflation reports due over the coming days – from China, from Mexico, from the US – as well as the Bank of Canada and European Central Bank rate decisions, it feels like the ‘historically standard’ summer lull prior to a wave of significant event risk.

GVZ, MOVE, OVX, & VIX Technical Analysis: Daily Price Chart (March 8 to June 8, 2021) (Chart 1)

Market Minutes: Volatility Plunges; USD Rangebound as US Yields Steady; US Inflation Data on Thursday

The summer doldrums appear to be here after all. Measures of volatility are plummeting across the board. Measured to a base on March 8, exactly three months ago, the VIX (stock volatility), the OVX (oil volatility), the MOVE (Treasuries volatility), and GVZ (gold volatility) have all contracted by double digits; the VIX and MOVE are off by more than -30% each.

Video Technical Notes: DXY Index

  • The DXY Index continues to hold below former bear flag support that defined price action beginning in late-November 2020. Momentum continues to neutralize, with the pair intertwined among daily 5-, 8-, 13-, and 21-EMA envelope, which is still in neither bearish nor bullish sequential order. Daily MACD is rising while below its signal line, and daily Slow Stochastics are turning lower but still above their median line. Price action is likely to remain constrained in the run up to Thursday’s ECB meeting given the Euro’s weighting of 57.6% (barring a ‘leak’ through a favored media outlet like Reuters).

A Thread Runs Through

The major components of the DXY Index – the British Pound, the Euro, and the Japanese Yen – have something in common: the US Dollar component (of EUR/USD, GBP/USD, and USD/JPY rates) is lacking a significant driver at the moment. US Treasury yields have been moving sideways for the better part of two months, and it now appears that inflation expectations (as measured by the 10-year breakeven rate) have started to settle in as well. The net result has been US real yields that have been stuck in negative territory and moving sideways as well.

US Treasury Yield Curve (1-year to 30-years) (June 2020 to June 2021) (Chart 2)

Market Minutes: Volatility Plunges; USD Rangebound as US Yields Steady; US Inflation Data on Thursday

US Inflation Data Due on Thursday

According to a Bloomberg News survey, further upside in price pressures is anticipated with the headline inflation rate due in at +4.7% from +4.2% (y/y) in May, while core inflation is due in at +3.4% from +3%. Still “largely” anticipated by Federal Reserve policymakers, accelerating price pressures still may not do much to move the needle for the FOMC in the wake of the May US non-farm payrolls report.

That said, it appears that taper talk is about to intensify as inflation readings peak. Formal efforts by the Fed to shift perspective towards tightening monetary policy could result in US Treasury yields backing down – an ominous future for the greenback, particularly if inflation expectations remains elevated.

DailyFX Economic Calendar, ‘High’ Rate Events, Next 48-hours (Table 1)

Market Minutes: Volatility Plunges; USD Rangebound as US Yields Steady; US Inflation Data on Thursday

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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