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Market normalisation as volatility picks up?

Yesterday saw volatility spike in both equities and FX markets. The Vix index (which measures equity volatility) hit a one month high and FX volatility (as measured by the Deutsche Bank CVIX) rose sharply in the run up to the Scottish Referendum before pulling back, but yesterday spiked again to maintain levels not seen since earlier in the year.

This volatility is coinciding with a broad sell off in equities and the US dollar continuing to make its way higher. The move cannot necessarily be considered a risk aversion shift by investors as the US dollar is quickly becoming seen as an asset currency as opposed to a funding one and as a result people aren’t necessarily being attracted to it for its usual safe haven attributes. The problem with this is that the dollar trade is now becoming quite a crowded one and is therefore susceptible to a correction. The dollar index reversed much of its gains yesterday in the final few hours of trading and so a lot rides on today’s US GDP figure.

The Q2 annualised figure is expected to come in at 4.6% a rise from Q1’s dismal decline of -2.1% and higher than previous readings. The dollar move higher is telling us that investors truly believe in the US recovery and even though most recently data has not been too impressive, the labour market continues to improve as indicated by yesterday’s better than expected weekly figures and yesterday the Fed’s Richard Fisher mentioned in Rome that the first rate hike “maybe sooner rather than later”.

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