Options markets pointed to a sharp increase in implied volatility, especially as the option term included the upcoming US elections.
Currencies such as the euro (EUR), the Australian dollar (AUD), the New Zealand dollar (NZD), the Mexican peso (MXN) and the South Korean won (KRW) saw solid increases in volatility.
According to analysts at Standard Chartered (OTC:), the most substantial percentage increases in implied volatility were observed in the Chinese yuan (CNH), the Mexican peso (MXN), the euro (EUR), the South Korean won (KRW) and the Singapore dollar. (SGD).
Currency risk during US elections
Investors are closely monitoring the potential currency risk associated with the US election by analyzing the rise in implied volatility over one- and two-week horizons. This increase highlights an increased focus on depreciation risk, especially with President Trump’s changing fortunes in the gambling markets.
The observed changes began a few days before the one- and two-week option windows, with notable moves around October 22 or 23, minimizing the chance that these changes were purely coincidental.
In terms of 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 more confidence in two-week implied volatility movements as an indicator, one-week volatility signals are expected to become stronger 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 increase in implied volatility for the Singapore dollar (SGD) was notable, especially as other currencies with similar volatility profiles did not show similar increases. Latin American currencies, with the exception of the Mexican peso, and certain Asian currencies expected to be affected by tariffs on China, appeared less affected by election-related volatility.
Compared to the 2016 and 2020 elections, the increase in implied volatility has been more significant this year, indicating uncertainty in the market about both the election outcome and the subsequent policy agenda, especially if President Trump were to win. This uncertainty extends to whether the outcome will result in a sweep or a divided Congress.
In terms of spot market movements, the Bloomberg Dollar Spot Index (BBDXY) is up 1.5% since mid-October. There is a possibility that most of this increase could be reversed if election results do not indicate the adoption of extreme policies.
The AUD, NZD and JPY, the weakest G10 currencies during this period, could see a reversal in both spot and volatility if the election implications are perceived as less severe than currently priced in by volatility markets.
