Investing.com– Most Asian currencies firmed on Monday as the dollar fell sharply from recent highs after soft labor data, with focus turning squarely to the upcoming presidential election and a Federal Reserve meeting. 

Focus this week is also on a Reserve Bank of Australia meeting, and a meeting of China’s National People’s Congress, with the latter set to provide more cues on fiscal stimulus. 

Regional currencies benefited from weakness in the dollar, with the and both falling about 0.6% each in Asian trade. The greenback was dented by softer-than-expected data on Friday, which showed the U.S. labor market was steadily cooling.

Uncertainty before the U.S. election also weighed on the dollar, as polls showed a tight race between Donald Trump and Kamala Harris, with voting set for Tuesday.

Additionally, markets were also positioning for a by the Fed later this week. 

The Japanese yen’s pair fell 0.9%, retreating from recent three-month highs. The yen also benefited from a somewhat hawkish message from the Bank of Japan last week.

Chinese yuan firms with NPC meeting in focus 

The Chinese yuan’s pair fell 0.4% from near two-month highs, with focus turning squarely to a meeting of the Standing Committee of the NPC that begins from Monday.

The NPC is widely expected to outline plans for more fiscal spending, with recent reports suggesting the body could approve $1.4 trillion in additional debt over the coming years. 

More cues on fiscal spending will be closely in focus, as Beijing struggles to shore up slowing economic growth. While the government had outlined a slew of stimulus measures in the past month, they failed to inspire much confidence among traders. 

Purchasing managers index data for October, released last week, also showed little improvement in Chinese business activity. 

Australian dollar upbeat ahead of RBA 

The Australian dollar firmed sharply on Monday, with the pair surging 0.8% before an RBA meeting.

The central bank is widely expected to on Tuesday, and is likely to signal no changes to rates, at least in the near-term. Analysts at Westpac and ANZ expect the RBA to only cut rates by February 2025. 

A hold by the RBA puts it in contrast to other major global central banks, which mostly kicked off easing cycles earlier this year. This trend offers some strength to the Aussie. 

Broader Asian currencies were mostly upbeat as the dollar retreated. The Singapore dollar’s pair sank 0.7%, while the South Korean won’s pair shed 0.6%.

The Indian rupee lagged, with the pair falling only 0.1%, and still remaining above 84 rupees.

Investing.com — BCA Research advises investors to take a tactical long position on the , highlighting persistent geopolitical risks that position the greenback as a solid hedge.

In a recent report, the investment research firm foresees a hawkish shift in U.S. trade and foreign policy regardless of the election’s outcome, noting that “the global political system is destabilizing.”

According to BCA’s Chief Geopolitical Strategist Matt Gertken, U.S. foreign policy is set to tighten, with a reassertion of “a credible threat against its rivals.” This anticipated shift, combined with escalating global tensions, reinforces the dollar’s appeal as a defensive asset.

The report points to the Middle East as a key flashpoint, particularly ongoing hostilities between Israel and Iran. Despite recent market responses that suggest stability, BCA warns against this false sense of security.

“Direct hostilities between Israel and Iran are an escalation, not a de-escalation,” Gertken states, underscoring that Israel’s recent actions could signal deeper conflict.

“Prior to this year, these two were not engaged in direct warfare and Israel was not pursuing regime change in Iran” he added.

With Iran likely to pursue nuclear capabilities amid heightened insecurity, BCA suggests that tensions will only continue to grow in the region, posing a risk to global oil supplies and potentially triggering a new oil shock.

The firm estimates a 40% chance of severe disruption if hostilities escalate, potentially removing millions of barrels from the global market, thereby amplifying volatility and boosting the dollar’s safe-haven status.

Beyond the Middle East, BCA also flags rising geopolitical risks in Asia and Europe. In Asia, North Korea’s alignment with Russia and possible conflict with South Korea create additional instability, while in Europe, the risk of a protracted U.S.-Russia standoff over Ukraine looms.

Gertken notes that European populism could see a resurgence if Trump wins, potentially undermining unity within the EU and further pressuring the . If Trump were to implement trade tariffs on European allies, it could set off a complex trade environment that supports dollar strength as Europe’s political risks grow.

With these dynamics in play, BCA’s stance on the dollar is grounded in a defensive strategy amid market complacency toward geopolitical risk.

“Global stability continues to deteriorate. But markets are not taking instability seriously, judging by our market-based geopolitical risk indicators,” the report states.

As such, BCA’s tactical recommendation is to “go long the dollar” to mitigate exposure to these global risks.

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:), 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 (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.