FX Options Insights 04/01/11
The exceptionally high FX option premiums surrounding the U.S. election suggest a severe and widespread FX volatility response. Dealers utilise implied volatility as a stand-in for FX volatility, which is a significant factor in FX option premiums. The biggest risk to FX markets in 2024 is implied volatility for options expiring after the U.S. election, as seen by a notable increase in implied volatility. If actual or realised FX volatility beats implied volatility or FX options, traders will profit. Because polling data indicates that the two candidates are tied, there is a greater chance of FX volatility, which might be prolonged if the results are tight and a recount is necessary. The U.S. election results were incorporated into the most recent benchmark expiry dates for one-week options, which saw a notable spike in implied volatility from November 30 to new 2024 highs for the majority. These implied volatility premiums keep rising, underscoring the perceived FX risk and continuous uncertainty.Central bank announcements from the US, UK, and Australia are also raising concerns about shorter-term foreign exchange volatility.
We can get a general idea of how FX will likely trade in the event of a Donald Trump or Kamala Harris victory by examining the last two U.S. elections and the ensuing ramifications throughout the FX market. Due in large part to the dollar's status as a liquid China proxy for trade, Trump's unexpected triumph in 2016 caused a wave of dollar purchasing across the board, particularly against the euro, yen, MXN, and AUD. Naturally, it is important to note that because the yuan is closely controlled, currency movements are far more muted than they would be if it were freely traded. The growing likelihood of a Trump victory, at least in the betting markets, had made the most recent bid in the dollar worse, as we have seen in recent weeks. Trump's increased tariff talk has led many to believe that, should he win the presidency again, the dollar's trajectory will resemble that of 2016, but to a lesser extent because the shock value will be more constrained. Conversely, Joe Biden's 2020 election victory establishes the standard for what a Harris victory would entail, which generally suggests that the dollar and volatility would decline in the near future.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!