October rally remains in place but taking a breather, Aussie dollar bulls pushing AUDUSD higher, ASX futures down 13 points

Small gains overseas have helped sustain an October rally that has taken global equity markets around 5% higher for the month so far. This is an extremely positive start to the month and is being complemented by an absence of profit taking - even during the softer sessions, the lack of residual fear from August is containing any falls. 

In today's first chart I've shown the relationship between VIX (S&P 500 implied volatility) and the ASX 200, going back to and including the GFC. Each time volatility has reached levels of 40 or above and then subsided, the falling volatility has coincided with a recovery in equity markets. Here are the details of the three periods circled in the chart:

  1. Global Financial Crisis: Volatility peaks above 89 in October 2008. The ASX 200 recovers from lows of 3,073 in March 2009 to 5,025 in April 2010 as VIX returns to levels around 15
  2. The Flash Crash: Volatility peaks above 48 on 6 May 2010. The ASX 200 recovers from lows of 4,175 in May 2010 to 4976 in April 2011 as VIX returns to levels around 15
  3. European sovereign debt crisis: Volatility peaks at 48 on 8 August 2011. The ASX 200 recovers from lows of 3,765 in August 2011 and a rally kicks off that ultimately lasts until 2015's highs of just below 6,000 points

The usual caveat applies: past performance is not an accurate guide to future returns.

Today's last chart shows the AUDUSD stretching to meet up with August selling resistance levels at just above US$0.7350. It's great to welcome Rivkin's Senior FX Trader Richard Sexton back after a short break, who is keeping an eye out for China trade data today and tomorrow's Chinese CPI figures and notes that "...the huge short positions held by speculators in this pair are beginning to be unwound as per the US Commodity Futures Trading Commission weekly positioning report, so the squeeze is getting under way." In other words, the bulls in the AUDUSD pair are trampling the bears, forcing those who held short views to buy back their positions, which is exacerbating the rally. He feels levels above US$0.75 are probable to be met in the short term.

Source: Rivkin, Saxo Bank

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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This article contains information about foreign exchange contracts, which are considered complex financial products. Please click here to read ASIC's foreign exchange trading article before considering an investment in foreign exchange contracts. 

This article contains information about CFDs, which are considered complex financial products. Please click here to read ASIC's "Thinking of trading contracts for difference?" document before considering an investment in CFDs.
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