NAB: The increase in market fear has knocked the Aussie Dollar's fair value by 10 cents

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The Aussie dollar traded down to a low of 0.7058 last night when the Dow was off 1,000 points and fear in global markets was at its nadir.

Of course as the Dow rallied a little, it closed down just 588 points, fear receded a bit and the Aussie has climbed back to 0.7169 this morning.

Market fear has certainly shot up recently says Ray Attrill, the NAB’s co-head of global currency strategy. In a note this morning he highlighted that the worries in US stock markets as measured by the “‘fear gauge’ soubriquet commonly applied to the VIX (a measure of the volatility of the S&P 500 option market but which only goes up when stocks go down) hit a high of 53% today.” That’s compared to where it was earlier this month at just 11%.

That’s important because market fear, as measured by the VIX, “feeds directly into our assessment of short term fair value for the AUD/USD rate,” Attrill said. He added that “last week, this was indicating short term fair value close to 80 cents; today, it is more like 68 cents.”

Attrill also told Business Insider that “the spike in VIX accounts for almost the entire 10+ cent fall.”

“Of course, we can’t reasonably expect Volatility/VIX to remain at 40+ levels indefinitely,” he said. But he highlighted that “if it does hold up here for the time being (and you’ll recall VIX held between 60 and 90 throughout Oct-Nov 2008) then the risk of break below 0.70 cents occurring sooner rather than later becomes very elevated.”

Markets like these seem to compress time and such a move could bring the NAB’s 68 cent forecast into play. But Attrill added that forecast was “not till early next year.”

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