The Chicago Board Options Exchange’s Volatility Index is known by the market as “the VIX” and referred to by the popular media as “the fear index”. In essence it measures the cost of options on US equities. When investors are worried that prices will move sharply they are willing to pay more for those options to protect themselves and the VIX goes up: when they think everything is hunky dory they pay less, sending the VIX lower.
Currently the VIX is below 10 and close to its lowest level since 1993. To put that in context, at the height of the global financial crisis it touched 60. Investors are just not worried right now. A symptom of that is the weakness of the Japanese yen, a currency that becomes popular as a safe-haven in times of stress. Over the last week and month the yen has fallen by -1.7% and -6.5% respectively against sterling: no other major currency put in a worse performance.
Pound profits again
One of the things investors are not worried about is sterling. Once again it was the week’s top performer, strengthening by an average of 1.1% against the other dozen most actively-traded currencies. The pound added half a US cent and a third of a euro cent. It was up by a full Swiss cent because the franc, too, was less in demand as a safe-haven.
As well as continuing to benefit from the fair wind of the expected general election win for Theresa May’s Conservative party the pound also received assistance from some better-than-expected economic data during the week. The purchasing managers’ index (PMI) measures of business activity in the private sector all came in above forecast. Because investors had been pessimistic about the numbers following the dismal figures for growth in the first quarter, the positive surprise gave sterling a boost.
Selling the fact
During the two weeks between the first and second rounds of the French presidential election investors were filling their boots with euros. The moderate Emmanuel Macron was sure to beat the nationalist and anti-euro Marine Le Pen the run-off so they were no longer worried about the single currency. Sure enough, M. Macron won handsomely on Sunday.
Investors who had bought into the rumour of a Macron win patted themselves on the back and hurried to take profits by selling off their long-euro positions. So in the wake of the final vote the euro went down. But never mind, it is something else not to worry about.
The good news
In many ways the extreme relaxation of investors is a good thing. When they are relaxed they do not feel the need to push currencies around hither and yon. Rather, they are inclined to sit back and watch exchange rates drift.
The bad news
It is one thing to be relaxed, another thing entirely to be complacent. There is no shortage of potential triggers out there that could send the VIX higher in a single bound. To pick on some of them, in no particular order: there is the tension between the two Koreas and the involvement of the United States and China therein; trade relations between the States and its neighbours are at a low ebb as the US president leans towards protectionism; politics in Europe remain in a tricky situation, notably in Greece and Italy.
Sarah, Senior Account Manager at Moneycorp
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