The JP Morgan G7 volatility index hit a low of 6.16 percent. This is significantly off the highs of 2006 which were above 9.5 percent. This volatility decline has come with the dollar near all-time lows on the DXY index and against the Euro. The one direction move of the dollar for most of the year has forced volatility down. A decline without volatility does not capture the attention of the market especially if equities are on a rise.
Volatility is related to market uncertainty or heterogeneous expectations. With a lack of consensus, there is more likelihood that prices will be move back and forth and create volatility. When there is strong agreement on the direction of the dollar, the lack of buyer and seller mix drives volatility lower. This has been coupled with the decline in volatility of many of the macroeconomic variables that affect currencies.
Lower volatility also signals market calm which leads to higher level of risk taking. The G7 currency volatility index is one input in some measures of global risk aversion. The combination of low credit spreads, low VIX index, low currency vol, and low swap spreads all suggest that investors are willing to take on more risk in the markets.
Nevertheless, we have a liquidity environment where all major central banks have either started to tighten or are on hold concerning any interest rate cuts. Risk taking behavior with tightening liquidity is a mix usually not seen in the market and is suggestive that asset prices will not be able to continue their ascent without some correction.
Volatility is related to market uncertainty or heterogeneous expectations. With a lack of consensus, there is more likelihood that prices will be move back and forth and create volatility. When there is strong agreement on the direction of the dollar, the lack of buyer and seller mix drives volatility lower. This has been coupled with the decline in volatility of many of the macroeconomic variables that affect currencies.
Lower volatility also signals market calm which leads to higher level of risk taking. The G7 currency volatility index is one input in some measures of global risk aversion. The combination of low credit spreads, low VIX index, low currency vol, and low swap spreads all suggest that investors are willing to take on more risk in the markets.
Nevertheless, we have a liquidity environment where all major central banks have either started to tighten or are on hold concerning any interest rate cuts. Risk taking behavior with tightening liquidity is a mix usually not seen in the market and is suggestive that asset prices will not be able to continue their ascent without some correction.
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