VIX Spike Needed To Spur Currency Volatility

Over the past week, volatility across the rates market has surged as the Federal Reserve opened the door to a more accommodative stance, which in turn has seen an aggressive rise in Fed rate cut bets with 68bps worth of easing priced in by the year-end. Alongside this, the growing concerns over the US-China trade war has also fueled demand for US treasuries. However, despite the sizeable drop in US yields, the USD has held up relatively well in comparison with the surge in rate volatility (highest since 2016) failing to spill-over into FX markets as 1-month implied vols remain relatively muted.

Fed Commentary

Vice Chair Clarida: “Attune to potential economic risks that could call for more accommodative stance” (May 30th)

Bullard: “Interest rate cut may be warranted soon on trade and inflation risks” (June 3rd)

Fed Chair Powell: “Fed will act as appropriate to sustain expansion” (June 4th)

Brainard: “Prepared to adjust policy to sustain expansion” (June 5th)

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Equity Market Volatility Potential Catalyst to Spur Currency Market Volatility

That said, given that equity market has also lagged the pick-up in bond volatility, this perhaps explains why currency volatility has been relatively muted, as such, focus would be on for a jump in the VIX before we see a spill-over into FX markets. In turn, it is useful to note which currencies are most impacted to a rise in the VIX.

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Japanese Yen Buying over EM and Commodity Currencies When VIX Jumps

As shown by the graph below, when looking for a rise in the VIX to stir currency volatility, strategic plays are best seen through safe-havens such as the Japanese Yen and Swiss Franc against emerging markets (ZAR, KRW, TWD) and oil sensitive currencies (CAD, NOK, RUB).

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Source: DailyFX, Refinitiv. (1yr correlation between FX pairs and the VIX)