Volatility Tracker: Negative Dollar Correlation

Volatility Tracker for the week of December 7, 2009

The jump in volatility indexes noted in our previous report was met with a similar decline last week.[2] The VIX could easily make a new 52-week low before 2009 is through. Gold implied volatility advanced sharply on Friday’s price decline [3], with GVZ closing just shy of my 30% short-term target. The shift in the volatility skew in gold deserves attention: if traders continue to pay higher premiums for downside protection this week, that should beconfirmation that the parabolic run in gold is over for the moment.

Two new charts were added this week, tracking the three month and one year rolling correlations in two pairs, the S&P 500 / US Dollar Index and the S&P 500 / Gold (GLD).[19,20] One of the most important features of market behavior in 2009 has been the “dollar carry trade,” i.e. the existence of a negative correlation between equities and the dollar. As is evident from [19], this relationship hasn’t shown any signs of changing yet. Note that, should the dollar rebound, this anomalous protracted negative correlation might prove just as dangerous in 2010 as it was benign this year.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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