IG | Sep 23, 2016 06:45AM ET
The ASX has found its mojo after a period of strong underperformance. It’s interesting to see such a strong inverse correlation between the ASX 200 and US volatility index (VIX) and this simply highlights the use of the ASX 200 as a vehicle to trade volatility and the ‘hunt for yield’. However, while we can see this inverse correlation first hand by simply overlapping the two charts, one can see that the big gains actually came from the names most exposed to a falling USD and that is the commodity plays and the industrial names that are naturally so leveraged to this space. As we have seen in the last six weeks or so implied volatility is absolute key as a catalyst for the local market.
For those who like things a bit less vanilla and happy to look at pairs trading one of the best ways to play (and for those with a lower risk tolerance) volatility is to trade the ASX 200 against the S&P 500 as a pairs trade. In periods of low volatility (like we are seeing now) the trade is long ASX 200/short S&P 500 and in time of increased volatility (and when we expect yield trades to be unwound) the trade is to go short ASX 200/long S&P 500. Volatility is the driving force by which dictates investment strategies and the companies you buy and for traders is one of the most key determinant of risk and money management.
Expect a stronger open today and as mentioned in point 10, with the market now having a greater understanding around policy changes from the Bank of Japan and Federal Reserve and with a light week ahead on the data front, next week it’s all about politics. Donald Trump has closed the gap somewhat of late, but still has a lot of work to do. He will come out firing next week and it should make for some entertaining and no doubt highly controversial watching. Expect US banks and the MXN (Mexican peso) to be the two weapons of choice for traders to express a view here on who wins the first debate.
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