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Market Is Reflecting Much More Volatility In Rates
In a confirmation of the general macro environment, swaptions vol is back to the previous highs of late 2008. The VIX has gotten a lot of exposure both on ZH and other outlets and many, rightly or wrongly, tend to read it as a much broader indicator of risk and risk sentiment than it is intended to be. However the vol on swaptions has the potential to cause significantly more damage, especially with the increased volume of long risk currencies over the past few month. It's important to caveat by noting that the tail isn't going to wag the dog and many market watchers (including myself) are very dubious of rate hikes, especially in the deflationary environment and political climate we are seeing.
Of course, commodities have the potential to unravel the whole mess especially with the strong positions of AUD, NZD and CAD over the past few months. We're not quite at the "coiled spring" stage for the commodity currencies yet but there's a pretty strong case against much further upside. The market action and the strong correlations since March may make it somewhat of a moot point as the rising tide of SPY lifts all boats but it will be interesting to keep an eye on.
Swaption vol vs. VIX, courtesy of Citi
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in all fairness i think there is probably as much case for further upside in commodity currencies as there is downside, despite the fact they have rallied so far
it's not necessarily my view but apart from positioning, the arguments for a stronger AUD are actually pretty evident.
Can you explain? I see a lot of stockpiling in China, not much production. At some point, when you have enough stockpiled, there's no reason to continue stockpiling. Are the Chinese not at that point now, especially considering that they were a bit overly optimistic on the production side of things? Seems to me they are.
like i said, it's not my view, i generally agree with you, however, the arguments are there.....interest rate differentials, relative economic performance, etc etc
is your view on stockpiling informed ?
and....Japan is still the equally largest trading partner of Australia.....so it's not all about China
I've talked to a lot of people, done a lot of my own analysis and discussed the issue with friends and ex-colleagues who would be considered "smart money": all signs point to stockpiling to a very serious degree. Some of the anecdotes are pretty striking.
i have had a similar view since late May based upon conversations with physical metal traders in the region and buyers of ore for some of the tier 2 mills, though the market is telling me that I am wrong
VIX up again today.
Get ready for the CNBC primetime DXY VIX special.
it seems to me that we're setting ourselves up for a fractal move...one way or another
If there were a strong case against further upside, then I doubt we would be trading at these levels in the first place.
If anything, the fact that lots of supposed "smart money" is still fighting the rally in risk, despite a 50% S&P move up in 5 months, suggests further upside in the short-term, not an imminent bear move. Rallies that conventional wisdom is sceptical of usually continue until those fighting it throw in the towel en masse and cover their positions.
My best guess is that risk assets will top once the pain gets too big for the staff and pals of Zero Hedge, and they collectively puke out their short positions. I'd be surprised if it happens whilst so many people are still top-picking and fighting the market.
this post is just as speculative as the rally, nothing you say here is based upon any facts I am sorry