Gold & US Dollar Threaten Breakout as Rate Volatility Spikes

VOLATILITY, GOLD, US DOLLAR – TALKING POINTS

  • Volatility across various asset classes jumps as global risk headwinds drag markets
  • Spot gold has diverged from its historical relationship with gold volatility and interest rate volatility
  • Currency volatility remains relatively low but appears at risk of shooting higher

In our last cross-asset volatility report, we highlighted how price action across forex, stocks, bond and gold markets began to show signs of turning higher. Since then, expected volatility for these select asset classes has continued to climb as market participants wrestle with lingering global risks such as the US China Trade War, Brexit, monetary policy and geopolitical tension. Traders who typically fiend for volatility may soon find solace, however, judging by the extended rise in 30-day implied volatility measures for these various asset classes depicted in the chart below.

VOLATILITY EXPECTED FOR S&P 500, GOLD, OIL, CURRENCIES, US 10-YEAR TREASURY YIELD, AND EMERGING MARKETS: WEEKLY TIME FRAME (MAY 01, 2017 TO MAY 29, 2019)

While there have been clear signs that implied volatility gauges are starting to trend higher for most assets, expected price action in the gold and forex markets remain quiet. Yet, market participants may witness sharp moves in the currency market and gold in the near future considering cross-asset volatility measures tend to move in tandem with one another.

US DOLLAR PRICE CHART VERSUS CURRENCY VOLATILITY AND US 10-YEAR TREASURY VOLATILITY: WEEKLY TIME FRAME (MAY 01, 2015 TO MAY 29, 2019)

US Dollar Price Chart versus Currency Volatility and US Treasury Volatility

Investors are flocking to safety in US Treasuries following the latest influx of trade war tension and slowing global growth risks. In fact, the recent shock to market sentiment has sent US10YR Treasury yield plunging to 2.23 percent – its lowest level since September 2017. The sharp move in US Treasuries has sent the US10YR Treasury Note Volatility (TYVIX) soaring from a year-to-date low of 2.84 percent recorded early April to 4.81 percent today.

Large spikes in TYVIX generally precede upward moves in the US Dollar Index (DXY) which tends to be mirrored by rising currency market volatility (measured by an equally-weighted index of the CME’s volatility readings for Euro, British Pound Sterling and Japanese Yen). Seeing that demand for safe-havens like the US Dollar and Treasuries jumps during times of heightened market stress, the recent rise in TYVIX could imply that additional volatility may be headed to the forex market. A rip higher in the US Dollar resulting from widespread risk aversion may serve as the catalyst.

SPOT GOLD PRICE CHART VERSUS GOLD VOLATILITY AND US 10-YEAR TREASURY VOLATILITY: DAILY TIME FRAME (MAY 01, 2017 TO MAY 29, 2019)

Spot gold price chart versus gold volatility and interest rate volatility

With the recent ascent in TYVIX, the difference in anticipated gold price volatility – measured by the CME’s Gold Volatility Index (GVZ) – and US10YR Treasury volatility expectations just notched the lowest spread since the financial instruments began trading in 2015. Although this divergence may seem puzzling, the current lack of price action in gold could be regarded as a metaphorical ‘calm before the storm’ with a return in gold volatility lurking on the horizon. Consequently, the sizable disconnect between gold and interest rates threatens to push gold prices higher – particularly if investor sentiment remains damaged and appetite for risk ebbs further.

– Written by Rich Dvorak, Junior Analyst for DailyFX

– Follow @RichDvorakFX on Twitter

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