Volatility of JPY/USD Continues to Drift Lower – Reversal Could be Bad for US StocksJuly 21, 2014
A few weeks ago we wrote that the volatility of JPY/USD cross had absolutely collapsed and so we thought we’d give our readers an update to that post. Well, volatility in the JPY/USD cross has fallen even lower since then and is now pushing 40-year lows (first chart below). As it currently stands, the 65-day standard deviation of this FX pair is now just 3.9% annualized versus a long-term average of 10.2%, putting it exactly two standard deviations below normal. To help put this this low number into perspective, take a look at the second chart below showing this cross over the last two years. The series has basically flat-lined since April.
So why is this important for a US based investor? Well the volatility of the JPY/USD cross has tended to have a very good correlation with the VIX, which we all know has a highly negative correlation to the S&P500. Thus, if we see a some sort of return-to-the-mean move in JPY/USD volatility, we are also likely to see a pickup in the volatility of US stocks as well.