One-week implied volatility gauging levels in the euro and the Japanese yen rose to their highest since beginning of April, reflecting traders’ angst ahead of the U.S. election on Tuesday.
The U.S. dollar rose on Monday as investors prepared for the presidential election, while a surge in global coronavirus cases continued to weigh on sentiment. The greenback held onto gains after posting its largest weekly percentage rise since late September in the previous trading session.
“Volatility is rising because liquidity for hedges around the election is very thin, everyone’s the same way, there’s no one selling this stuff thinking everything’s great,” said Jordan Rochester, forex analyst at Nomura, adding that market participants are broadly hedging for a downside in the euro and a rise in the U.S. dollar.
Democratic challenger Joe Biden leads in national opinion polls though the race is seen as close in enough battleground states that President Donald Trump could achieve the 270 votes needed to win in the state-by-state Electoral College that determines the overall victor.
“It’s never clear whether the last minute swinging polls actually is a true reflection of the change in the race,” said Rochester.
He noted that either way, the result is going to be a shock for the currency markets. If Trump wins, it will be a surprise because investors are expecting Biden to win. But if Trump loses, it will be a jolt as well for traders in the derivatives market, who will see short euro hedges being wound down.
Rochester said a 1% or 2% swing in euro/dollar in either direction would be expected on Wednesday, the day of the election results.
The euro last fetched $1.1627, down 0.2% on the day. The dollar rose 0.3% versus the Japanese yen to 104.91.
One-week implied volatility gauges for the euro and the yen were both at above 11%, their highest levels since beginning of April.
The dollar index, which tracks the greenback against a basket of major currencies, rose to a one-month high of 94.28 and was last up 0.2% on the day.
Meanwhile, the novel coronavirus continues to ravage already-battered economies.
The British pound inched lower on coronavirus worries, after Prime Minister Boris Johnson announced over the weekend a one-month lockdown across England.
Sterling fell to its weakest in 2-1/2-weeks at $1.2863, down 0.7% on the say. It was also down by 0.5% against the euro at 90.35 pence.
In Europe, new COVID-19 cases have doubled in five weeks, a Reuters tally showed, with total infections surpassing 10 million.
The United States posted nearly 87,000 cases on Saturday and record hospitalisations in Midwestern states.
Elsewhere, the Australian dollar – a gauge of market participants’ risk appetite – fell to a three-month low of 0.6990 and was last trading down 0.4% on the day.
Reporting by Olga Cotaga; Editing by Peter Graff