Selloff or Market Correction? Either Way, Here's What to Do NextSee Overvalued Stocks

Options markets brace for US election Forex risk with volatility spike

Published 01/11/2024, 17:44
© Reuters.
EUR/USD
-
AUD/USD
-
NZD/USD
-
USD/ZAR
-
USD/MXN
-
USD/SGD
-
USD/KRW
-
DXY
-
USD/CNH
-

Options markets indicated a sharp increase in implied volatility, particularly as the tenor of the options included the upcoming U.S. election.

Currencies such as the Euro (EUR), Australian Dollar (AUD), New Zealand Dollar (NZD), Mexican Peso (MXN), and South Korean Won (KRW) experienced solid increases in volatility.

According to analysts by Standard Chartered (OTC:SCBFF), the most substantial percentage rises in implied volatility were observed in the Chinese Yuan (CNH), Mexican Peso (MXN), Euro (EUR), South Korean Won (KRW), and Singapore Dollar (SGD).

FX risk amid US election

Investors are closely monitoring the potential foreign exchange risk associated with the US election by analyzing the rise in implied volatility over one- and two-week horizons. This increase highlights a heightened focus on depreciation risk, especially with the changing odds for President Trump in betting markets.

The observed changes began a few days before the one and two-week option windows, with notable movements around October 22 or 23, minimizing the likelihood of these changes being merely coincidental.

For the two-week implied volatility, the largest increases were seen in the currencies of Mexico, South Korea, South Africa, China, Japan, Australia, Europe, and New Zealand. While there is greater confidence in the movements of the two-week implied volatility as an indicator, one-week volatility signals are expected to gain strength as the week progresses.

In contrast, the Indian Rupee (INR), Chilean Peso (CLP), Colombian Peso (COP), Israeli Shekel (ILS), and Canadian Dollar (CAD) were among the least affected.

The pronounced run-up in implied volatility for the Singapore Dollar (SGD) stood out, especially since other currencies with similar volatility profiles did not exhibit comparable increases. Latin American currencies, excluding the Mexican Peso, and certain Asian currencies anticipated to be affected by tariffs on China appeared to be less impacted by election-related volatility.

Compared to the 2016 and 2020 elections, the rise in implied volatility has been more significant this year, signaling market uncertainty regarding both the election outcome and the subsequent policy agenda, particularly if President Trump were to win. This uncertainty extends to whether the outcome will result in a sweep or split Congress.

In terms of spot market movements, the Bloomberg Dollar Spot Index (BBDXY) has risen by 1.5% since mid-October. There is a possibility that most of this increase could be reversed if the election results do not indicate the adoption of extreme policies.

The AUD, NZD, and JPY, which have been the weakest G10 currencies in this period, could see a reversal in both spot and volatility if the election implications are perceived to be less severe than currently priced in by the volatility markets.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.