Where did all the volatility go?!

I know that the VIX family is the staple to measure volatility. The way how this index is derived is through the (in)famous Black-Scholes formula, i.e. for a particular asset it is a function of three variables: its current price, the price of an option based on this asset, and the expiration date of the option. The VIX-like index dedicated to the currency market is the EVZ which gives the implied volatility for EUR options priced in dollars. For the last week this index has dropped from 13.3% to 11.6%, which I think does not capture at all the dramatic lack of volatility in the Forex that we saw Wednesday through Friday.

The easiest way to see what I mean is to look at the price of the dollar against the EUR 8:29 on Friday, 1.487. At 8:30 came the unemployment announcement, expected unemployment rate 9.9%, actual 10.2%. The response of the EURUSD rate was almost nonexistent--for the rest of the day it traded in a range of 30 pips.

That is spectacular!!! The first explanation that comes to mind is that the market had priced the unemployment announcement prior to the data release, which is kind of doubtful. The highest number from the pole that Bloomberg did before the announcement was 10.1%. The other explanation---a black whole sucked the volatility out of the global markets (here I am also referring to the tame response of the S&P500) and there is not a single bad news that may come and change this. A better name for this particular phenomenon is optimism, a filter that processes thirstily any good news and dismisses fast any bad one.

After two years of either loosing money or sitting on the sidelines with a pile of cash, the investors (strange predators with not necessarily rational habits) want to be back in the game. The FED is throwing a funding extravaganza and nobody wants to miss the party. Hangovers are in general easily forgotten (ask any college kid), so it doesn't seem that there are a lot of designated drivers in this particular party.

So the question is when will the market start to listen to bad news again. I mean the broader unemployment index is 17.5%. In an economy that depends 3/4 on the consumer, the unemployment cannot be ignored for a long time. One of the possible party pooper events in the near future is the holiday shopping season. Lets wait and see.