Higher volatility in high summer
Historical studies show that market volatility tends to increase during the summer months with stock market wobbles reflecting less risk taking and lower liquidity. Traders are often on vacation which equally means lower participation in markets. In turn, Wall Street’s fear gauge, the VIX index, tends to see the largest rise of the year in August and it remains elevated through to the Autumn.
For foreign exchange markets, safe haven currencies like the Japanese yen and Swiss franc tend to outperform during the latter half of summer and into October. Indeed, short-term market measures of FX volatility that are currently drifting lower would pick up with an equity market shakeout.
The greenback suffered its third worst week of the year at the end of last month and has started this week on the back foot. The recent risk-off wave from the Chinese regulatory clampdown and the Fed’s potential step towards tapering would ordinarily give a bid to the dollar. But record lows in the real yields and Fed Chair Powell’s caution about the recovery have been enough to dent the greenback and expectations that the Fed will act soon in tapering its QE programme.
Regarding equity markets, we know that the longer the stimulus punchbowl is being passed around, the more stock market indices can continue to rise. We also know that real very negative rates are supportive of risk assets. But the recent gains in stocks are narrowly based making gains more susceptible to correction.
NFP key for the Fed and markets
The main economic data release of the month comes up on Friday in the form of the latest US jobs report published on Friday. Gains of around 900k are expected and should support the solid recovery path. But that still leaves some six million jobs lost since the start of the pandemic. The dollar’s fightback from the May lows is in danger if the data is weak. That said, more equity shocks from China and further Delta variant scares should eventually give the greenback some support.
Last week’s low at 91.78 in the DXY is the first line of support for dollar bulls. Otherwise, there are a few long-term moving averages (100-day and 200-day) that would be expected to offer further support just below here. It’s all to play for in thin markets which can leave many participants scratching their heads at the summer volatility.