Resolved Question
Can the VIX be used to forecast currency movements?
about 1 year ago
Best Answer - Chosen by Asker
Yes, by taking into account the correlation of the currency pair to the stock market.
VIX stands for the volatility index of the S&P500 and is often referred to as the "fear index". As such, it measures the implied or expected volatility for the stock market for the next 30 days. A high value means that higher volatility is expected. Also, extremely high readings usually indicate stock market bottoms and extremely low readings usually indicate stock market tops.
Now, the movement of the USD is inversely correlated to the movement of the US stock market. This is because, during times of risk aversion, traders tend to buy up the safe-haven USD and steer clear of riskier assets such as stocks. On the other hand, when risk appetite is high, traders buy up higher-yielding riskier assets, such as stocks, and sell the lower-yielding USD.
Putting these two concepts together... A high VIX reading indicates a market bottom, which means that stocks would soon climb up. By virtue of the stock market's inverse correlation with the USD, this would then mean that the USD would soon drop. Conversely, a low VIX reading indicates a market top, which means that stocks would soon drop down and the USD would climb.
about 1 year ago
Answers (1)
The VIX or volatility index is used to measure the markets' expectations for volatility over the next month. Readings above 30 means that investors are anxious or uncertain about the markets while readings under 20 indicates investors are calm.
High readings are usually accompanied by sharp declines in equities while low readings are typically associated with rising markets. During the stock market crash of October 1987, the VIX shot up as high as 172 from mid-20s the week before!
How can you use this to forecast currency movements?
Well, increased risk appetite, or low levels VIX levels are often associated by a surge in carry trades, which is the buying of a high-yielding currencies, stocks, commodities by the borrowing of low-yielding currencies. Although simplistic, a low VIX could be used as additional confirmation to buy the AUD/JPY for instance.
about 1 year ago
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