Currency VIX and Equity VIX Divergence

18 Feb

In a sea of declining volatility, worth highlighting the (slight) counter currents within the FX markets.

The CVIX index is a measure of the weighted average 3 month implied volatility of about 9 of the major currency pairs, mainly USD pairs with a few EUR crosses.

As shown in the attached chart (as at 18 February 2013, source: Bloomberg) it largely moves in tandem with the VIX index, however since the turn of the year rather than continue the march downwards, it has slowly ticked higher.

This stands to reason economically of course, while central banks’ loose monetary policy and ample liquidity provision serve to dampen down volatility in other asset markets, these policies can lead to depreciations (and expectations of further depreciation) in the currency markets, leading to investors and traders paying slightly higher premiums for protection against one currency depreciating against another.

this year this has particularly been the case for the JPY against the USD, and also sterling against the USD. both of these pairs have seen their 3 month implied volatility rise since the start of the year. the same is true to a lesser extent of the EURUSD. These three currency pairs are among the highest weighted in the CVIX index.



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