Forex
Dollar drops to two-week low as investors take profit on ‘Trump trades’
By Medha Singh and Wayne Cole
(Reuters) -The dollar dipped on Monday as investors braced for wide-ranging implications for the global economy this week from the outcome of U.S. elections and a likely interest rate cut from the Federal Reserve.
The euro jumped 0.7% to $1.0906. The dollar fell nearly 1% on the yen to 151.645. The eased to 103.65, its lowest in two weeks against a basket of currencies.
U.S. Treasury yields dropped 8 basis points (bps), retracing some of Friday’s surge. [US/]
Democratic candidate Kamala Harris and Republican Donald Trump remain almost tied in opinion polls and the winner might not be known for days after voting ends.
Investors in recent weeks increasingly positioned for a Trump win, and expected his policies on immigration, tax cuts and tariffs to put upward pressure on inflation, bond yields and the dollar. Harris is seen as the continuity candidate.
Strategists said the dollar weakness on Monday was linked to a poll that showed Harris with a surprise three-point lead in Iowa. A separate New York Times/Siena College poll showed Harris was marginally ahead in Nevada, North Carolina and Wisconsin and Trump just ahead in Arizona, among the handful of battleground states where the election is most competitive.
“The polls suggesting that Harris may have her nose in front in couple of swing states is causing a bit of profit-taking in the Trump trade,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale (OTC:).
“Markets are very stretched – long dollars, short Treasuries – into the vote tomorrow so it’s only natural we are adjusting some of that positioning.”
Betting site PredictIT showed Harris at 53 cents and Trump on 52 cents – what investors are willing to wager for a chance to win $1 – a turnaround from 45 cents and 59 cents respectively, just a week ago.
“It’s certainly one of the most uncertain U.S. elections compared to recent ones,” said Roberto Mialich currency strategist at UniCredit, referring to positioning in the options market that showed investors were buying protection against wild swings following Tuesday’s vote.
“The risk that we may not have a black and white result as early as Wednesday is adding to the uncertainty.”
The one-week implied volatility options for euro/dollar was at the highest since March 2023.
Reflecting investor anxiety over trade relations, implied volatility for China’s , seen on the frontline of markets’ reaction to the U.S. election, was at a record high, while that for dollar/Mexican peso was at the highest since April 2020, surpassing the previous election cycle.
PRICED FOR 25BP
This week also includes the Fed’s policy meeting when the U.S. central bank is widely expected to cut rates by a standard 25 basis points on Thursday, rather than repeat the outsized half-point easing of its last decision.
Traders see a 98% chance of a quarter point cut to 4.50%-4.75%, and a near 80% probability of a similar sized move in December, according to CME’s FedWatch tool.
“We are pencilling in four more consecutive cuts in the first half of 2025 to a terminal rate of 3.25%-3.5%, but see more uncertainty about both the speed next year and the final destination,” said Goldman Sachs economist Jan Hatzius.
“Both our baseline and probability-weighted forecasts are now a bit more dovish than market pricing.”
The Bank of England also meets Thursday and is expected to cut by 25 basis points, while the Riksbank is seen easing by 50 basis points and the Norges Bank is expected to stay on hold.
The Reserve Bank of Australia holds its meeting on Tuesday and again is expected to hold rates steady.
The BoE’s decision has been complicated by a sharp selloff in gilts following the Labour government’s budget last week, which also dragged the pound lower.
Early Monday, UK bonds stabilised and sterling regained some of its losses to stand at $1.29820. [GB/]
More stimulus is also expected from China’s National People’s Congress, which is meeting from Monday through Friday.
Forex
Asia FX firms as dollar pares recent gains ahead of elections, Fed meeting
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.
Forex
Go long the dollar, BCA says as geopolitical risks to persist
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.
Forex
Options markets brace for US election Forex risk with volatility spike
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.
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