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.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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