Investment Desk Bulletin

23 March 2018

Is the Volatility holiday over? What is driving the US dollar?

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In this week’s IDB, Investment Specialist Matthew Farrell seeks to answer two key questions for investors right now:

  1. Is volatility making a return to markets?
  2. Why has the US Dollar remained so weak?

Currently, financial markets face increasing economic, monetary policy and geopolitical uncertainty. This is evidenced by the February spike in volatility. After a period of supressed volatility, the VIX index reached its highest level since 2015, cross-asset class correlations and volatility surged.

Global growth expectations are edging higher, inflation pressures are starting to firm and in turn monetary policy is on the path to normalisation. Geopolitical risk is at its most elevated level in 15 years and all while valuations are stretched. With these factors in mind we should expect the baseline for market volatility to increase in the coming quarters, at London & Capital we maintain our cautious stance, with a selective approach to highly liquid investments.

The US Dollar has been under pressure for some time, but what is driving this? The US Dollar has decoupled from yields and is being driven by a mix of deteriorating twin deficits, an inconsistent Dollar policy in Washington and a set of cyclical pressures, including increased appetite for European and Japanese stocks over US equities, the oil price rally and international funding via the US Dollar. Market positioning may contain immediate further significant downside, but until the structural, political and cyclical forces are exhausted the Dollar is likely to remain under pressure.