Investing.com – According to Bank of America Securities, US election risk premiums are richly priced in the currency markets, but may already be overpriced.
Historically, most currency volumes don’t realize enough to recoup the implied volatility premium around the U.S. election, U.S. Bank analysts said in an Oct. 7 note. performance after the elections.”
The bank noted that a significant risk premium is being priced into currency markets ahead of the US elections, especially in Asian emerging markets.
“Here we see that the average major currency pair is priced at a 108% premium to the 2016 and 2020 average, as measured by the daily rebound in implied volume of 2 million two months before the US election,” said BOA.
However, Asia’s emerging market stocks have not performed in the US elections since 2012, the bank said, and are therefore in favor of declining implied maturity.
In a favorable election scenario, we see the spot broadly in a range of 6.85-7.30, and strikes at similar levels offer a sufficiently attractive premium for full sellers in our view.
“As a result, we think a short USD/CNH strangle is attractive to wipe out the rich volatility premiums. The risk to this view would be that larger-than-expected fiscal stimulus in China would generate excessive USD/CNH swings,” BOA said.
AT 04:35 ET (08:35 GMT), USD/CNH was trading 0.5% lower at 7.0621.
