What a Difference a Week Makes

Well in FX land anyway...equities are sharply unch over the past week. Check out cable though. Monday of last week, GBP was the friendless kid standing in the corner of the playground. The CEBR had published a report saying rates would stay at 0.5% until at least 2011 and cable was flirting with 1.57. Then we had a slightly lighter CPI in the US, some better jobs numbers in the UK, Fed mins which seemed supportive of more rather than less QE, chat in the UK of halting the QE programme and GBP was off to the races. Not even Posen’s comments over the weekend could derail it for longer than a couple of hours. Yesterday, the US PPI came in light and now the BOE mins show that they voted 9-0 to keep the QE programme (fears were some would push for expansion) with the comments sounding if anything, slightly more hawkish. Cue another rally; it's now at 1.655!

It’s not the only one either, CAD was heading for parity, no doubt about it. Then Bank of Canada went and left rates unchanged at 25bps, which to be fair was expected but they added some cautionary comments about the Loonie’s strength compromising its competitiveness…just in case you missed that in Econ101. Anyway the old CAD has fallen about 3% since. I wonder though how long this lasts. These FX trends have been very strong with great momentum, particularly in the resource currency space…and the Kiwi and AUD have been strong this morning and we saw how quickly Cable once again became the cool kid. And this is not just a risk proxy trade anymore, we've seen these currencies hold up well in the (admittedly) brief sell offs we've seen in this, the mother of rallies. A caveat would be that CAD of late hasn’t been as strong the Antipodean currencies, as rate hikes started to become priced into the latter.
The result has been a c7% increase in currency vol over the last week, which in this low vol world, especially in FX, is actually quite a lot and has broken out of its recent range.

The VIX itself continues to make new 12m lows with this month seeing it break below its support level for the previous 3 months…which makes sense of course given equities seem largely incapable of going down and people talk of big sell offs when the market falls 50bps yet 2% up days fail to really register. It even went down yesterday, when the market was down! You'd think at least you'd be able to hedge against volatility with volatility but it seems not!