As the US election approaches, the global currency market is facing a new wave of significant volatility risk. The cost of hedging against the US dollar has risen to its highest level since the early days of the 2020 pandemic, with market investors focusing on potential currency fluctuations that may arise from the upcoming election. Options data show that traders anticipate significant fluctuations in G10 currencies in the coming days, with the yen, Norwegian krone, and New Zealand dollar being particularly sensitive. Additionally, the Mexican peso and South Korean won are key focuses of expected market volatility.
Yen Dominates Expected Volatility
The yen's volatility dominates one-week option pricing. Since this period first covers the US election day on November 5, investors have heightened preventive measures. The latest national poll shows nearly equal support for President Harris and former President Trump, intensifying market uncertainty. The surge in expected volatility across various currencies reflects market concerns about the election outcome and possible policy changes it may trigger.
Mexican Peso: Grim Outlook for Volatility
The Mexican peso fell to its lowest point since September 2022 earlier this week, indicating its sensitivity to external changes. The volatility for the coming week has risen to a new high since 2019, with a key options market indicator—the gap between actual volatility and future predicted volatility—reaching its second-highest level since Bloomberg began tracking it in 2007. The peso is particularly influenced by US policies due to its geographical proximity and close economic ties. Trump previously stated that if elected, he would impose tariffs on US companies with factories in Mexico, making the peso a popular target for hedging funds and investors seeking safe havens.
Euro: Affected by Potential US Trade Policy Impacts
The euro's volatility has also risen significantly recently, reaching its highest level since March 2023. As Trump criticized Europe for benefiting at America's expense on trade issues during past campaigns, the market remains vigilant about the euro's potential downward pressure should the Republican party win the election. Goldman Sachs analysts suggest that if Trump wins, the euro could depreciate against the dollar by as much as 10%, potentially falling to 1.05 in the coming months. According to industry traders, some hedge funds have begun positioning with euro put options, which is also reflected in recent options trading records.
In this uncertain market environment, the EU is also beginning to prepare response plans, including drawing up a list of potential trade targets against the US to counter possible trade friction risks.
