Fed Action Forecast To Alter Levels On VIX, EUR, USD & JPY

July 30, 2014 - Written by John Cameron

STORY LINK Fed Action Forecast To Alter Levels On VIX, EUR, USD & JPY

The markets have been hit by an unexpected bout of complacency during recent months. Despite the continuation and extension of the Arab Spring into the Middle East, with the Islamic State, (formerly known as ISIS), surging into Iraq during the early part of this year, investors remained unfazed.

Even when Russia appeared likely to launch an all-out land offensive into Ukraine within recent months, market participants remained sanguine. A quick glance at the VIX index, which gauges the level of protective ‘put’ options placed by equities traders on their purchases of shares, indicates that despite geo-political risk events this week, levels of panic amongst investors remain at rock-bottom levels. The so-called Fear Index remains resolutely close to its post Credit Crisis low of 12.58, which it touched off during the middle part of this month, in spite of an escalation of bloody violence in Gaza which has seen over 100 Palestinians killed by Israeli mortar attacks during the past 24hrs.Yesterday’s trading saw the VIX dip to as low as 13.03.

One reason for the apparent complacency amongst institutional investors is the conventional wisdom that the flow of ‘easy money’ from the world’s central banks is set to continue into the medium term. The European Central Bank announced almost a month ago that it will be making €1bn available to the euroland’s retail banks as part of its targeted Long Term Re-financing Operations in an effort to get local credit markets moving once more.

Meanwhile, futures markets are still predicting that the first interest rate increase from the US Federal Reserve is a year or more away. Tonight’s comments from Fed Chair Janet Yellen are likely to be instructive; we already know that the US central bank is on a set path to completely phasing-out its Quantitative Easing programme by the end of October. However, with five consecutive monthly labour market data releases showing that over 200,000 jobs had been generated in the world’s number one economy, it may prove difficult for Yellen to feasibly argue that the first move in a fresh domestic interest rate-hiking cycle is anything but close at hand.

Her comments will be closely monitored for clues regarding the timing of such a move; if Yellen does confirm that the cost of borrowing is set to increase, the look for the US Dollar (currency:USD) and the Japanese Yen (currency:JPY) to re-assert themselves as the world’s reserve currencies of choice. VIX will also be likely to rise as a result, and one loser in such a situation is likely to be the euro (currency:EUR) which has shown itself to be brittle in the face of ‘risk-off’ trading environments during recent months.

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