The VIX price suggests a spike in market volatility might be nearing

[MongiIG]

A weaker dollar (USD) and stronger equity markets has seen a risk on trade environment reflected thorugh a gradual decline in the Volatility index (VIX) as well.

Source Bloomberg

 

Forex Indices VIX Consumer price index Volatility Inflation

 Shaun Murison | Senior Market Analyst, Johannesburg | Publication date: Thursday 09 February 2023 

Often referred to as the ‘Fear’ guage, the VIX highlights the relationship between 30 day put and call options on the S&P500 benchmark index.

The index is known to reflect the cyclical nature of volatility and market participants will now be considering whether current prices, which trade near one year lows are suggestive for at least a near term spike in volatility to follow.

The VIX

 

Source IG

The VIX has been drifting lower since late October 2022. The move lower follows a bearish price reversal near resistance at 34.30.

The long-term trend for the VIX remains sideways, as tends to be the nature and cyclicality of volatility.

Over the last few days, we have seen the price forming a bullish reversal just above range support at 18.20. The reversal starts to suggest that after a few months of a risk on market environment we could see the market move into a risk off phase.

The risk off market environment is not yet confirmed. For confirmation, we would like to see a strong move up above the red trend line on our chart. In this scenario 22.50 becomes and initial resistance target from the move, while traders might consider using a close below the 19.95 level as a failure indication for the trade should it manifest.

Key data

Over the next week or so there is certainly enough in the way of US data which could catalyze at least a near term spike in volatility which would reflect in the VIX:

• 10 Feb Preliminary UoM Consumer sentiment data
• 14 Feb Consumer Price Index (CPI) data month on month (m/m) and year on year (y/y)
• 14 Feb Core CPI data m/m and y/y
• 15 Feb Retail Sales m/m
• 15 Feb Core Retail Sales m/m
• 15 Feb Empire State Manufacturing Index data
• 16 Feb Producer Price Index (PPI) data m/m and y/y
• 16 Feb PPI data m/m and y/y

Amongst the data, the CPI release is likely to have the highest propensity for volatility, being a measure of inflation, a core theme in markets right now as it pertains to the path of monetary policy. While CPI is not the primary metric for the Federal Reserve to measure inflation (Personal Consumption Expenditure is), markets have in recent times taken their cues from each monthly print.