Investors have been lulled into believing the world is a safer place and that risk premium (volatility) should continue to trade low. After all, most assets have been trading in a very boring fashion.
Interesting to note is the fact FX volatility has started to move rather “violently” over past sessions.
EURUSD 1 month at the money volatility has spiked big time, putting in the biggest percentage move higher in vols since last August. This is definitely feeding into trader’s risk systems, and giving the low levels of volatility over past months, VaR has probably fed into the risk mangers model, allowing traders to take on even bigger risk.
Bear in mind, volatility and gamma work both ways. With Japan going into long holiday mode, liquidity could also become an issue.
The broad JPM FX volatility index saw a move higher as well.
The JPYUSD cross has seen boring price action, but last days increased “turbulence” has resulted in popping volatilities as well.
FX is the big market and an asset to watch closely. Global economic “stress” is usually first seen in currencies that eventually feeds over to other assets.
With equities in full melt up mode since December lows, and major US indices all at or around ATH levels, we ask ourselves if the small pop higher in VIX could become something bigger, especially given the fact FX markets have started telling us something.
Source; charts by Bloomberg