FX options wrap - U.S. election FX volatility risk warnings
Implied volatility gauges FX realised volatility risk, so it's no surprise to see it trading extreme highs before the U.S. election on Tuesday. The two candidates are neck and neck, which is adding to the uncertainty that can drive volatility.
One-week implied volatility is significantly higher since its option expiry date moved past the U.S. election results, with the majority of the main USD/G10 FX implied volatilities trading new 2024 highs.
One-week USD/CNH implied volatility reaches 10 year highs at 15.0 from 5.0 prior and there's been a similar three-fold increase in 1-week USD/MXN implied volatility to 4-year highs at 42.0 so far. These currency pairs are expected to see the most significant reaction to the U.S. election outcome.
USD/JPY has been contained in the lower 150's, but could extend beyond current option market break-evens. According to a leading Societe Generale economist, the yen could fall as low as 160 if Trump wins while gaining control of the U.S. Congress, or climb as high as 140 if Harris wins but Republicans take control of the senate, the two most likely scenarios.
The recent shift in IMM speculative positioning for a stronger USD leaves many vulnerable to the Harris win/weaker USD scenario and has been driving demand for USD put options to hedge that risk.
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USD/MXN 1-week implied volatility vs USD/MXN FX spot https://tmsnrt.rs/3UEBp6a
1-week expiry USD/CNH FXO implied volatility https://tmsnrt.rs/3Asxd2w
1-week expiry FXO implied volatility https://tmsnrt.rs/4fxoniQ
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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