July 7, 2020
AliExpress WW
FX Traders Brace For The "Unthinkable": An Election With No Clear Winner

FX Traders Brace For The “Unthinkable”: An Election With No Clear Winner

AliExpress WW

Various polls have shown that Joe Biden commands significant leadership over Donald Trump ahead of the presidential election in November, and even online betting sites such as PredictIt, representing Biden as the favorite at 14 points, are clearly surprisingly optimistic about the change of leader in the stock market. Democratic President, even if it entails higher corporate taxes (some possible reasons for this were discussed here)

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However, although stocks still seem unaffected by political events, this cannot be said of currency traders, who, according to Bloomberg, “I begin to behold the unthinkable”: The possibility that the US presidential election will not lead to a clear winner will lead to protracted uncertainty.

According to the implied volatility of the yen, there is a sharp jump in expected price changes on election day, which is expected to continue until 2021. This contrasts with the preparations for the 2016 elections, when the indicator of shocks on the currency exchanges reflected only a temporary nature. a slight increase in volatility, as investors generally overlooked the likelihood of Trump’s presidency – or any argument over the results – leaving them painfully susceptible to these events.

This time, however, traders are much more cautious and, given the difference between 3 and 6 months of the Japanese yen, are concerned that elections may begin in late November due to recounts and litigation, said Greg Anderson, head of FX at Bank of Montreal. strategy. This added political uncertainty – which may also be due to concerns about the coronavirus or economy – immediately after the November elections, raised the premium for dollar-yen options to an eight-year high against short-term ones.

This means that unlike stocks, where the Fed is still in full control, investors “will have to think about how the FX market will respond to a protracted phase of uncertainty if the outcome is unclear,” said Ned Rumpeltin, European Head of FX Strategy at Bank of Toronto Dominion.

A possible delay in the election results brings back memories of the 2000 election match between George W. Bush and Al Gore, when a debate over the recount caused a month-long legal struggle.

This was an alarming signal for traders who saw how the premium for options remained suppressed throughout the vote, and suddenly had to evaluate the price in the face of political uncertainty.

One of the possible complications this time is an increase in the number of Americans requesting to vote by mail, which, according to Bloomberg, could complicate the process of counting votes. And in what may be a hint of the future, the New York State Election Commission said it would not begin to count votes in the primary elections on Tuesday until July 1 so that it would be possible to double-check the records in the district. It is significant that the state has a 10-fold increase in requests for absentee ballots.

A spate of absentee ballots in November, which could be inevitable if a second covert wave engulfs the country, will lead to delays in certification races up and down the ballot, former Deputy Director of the New York State Electoral Council Joe Burns said in a speech. A telephone conference organized by the Democracy of Lawyers Foundation, a conservative election group.

Not surprisingly, traders tend to take cover, and, as Bloomberg notes, the expected volatility of Election Day this year is as high as in the midst of the unrest observed in mid-March – more than 30%. Four years ago, the volatility of the dollar-yen pair on the eve grew by 50%, and the results of the nightly elections were calculated.

Although there was a slight increase in hedging stock options against losses during the November 3 voting period,
there can be no better place for investors of different asset classes to express their opinion about the prospects for the United States for months to come than in the foreign exchange market, which offers a way to bet on the prospects of America relative to almost any other country.

Strategy SocGen FX Olivier Corber suggests considering the distribution of options between dollar-yuan and dollar-yen currency pairs as one way to track investors’ perceptions of the Trump and Biden match, as these pairs reflect a global sense of risk, geopolitical tensions and trade relations.

“The last election did not have such geopolitical significance, given Trump’s actions on trade and tariffs,” Corber said. “Compared to the previous election, the economic agenda of the two candidates will be more important than ever, because 2020 will be a year of recession.”

The real question now is what the year 2021 will be like: “Economic uncertainty is likely to be exacerbated by political uncertainty,” said JPM strategist Paul Megiesi, who said investors should buy a six-month dollar-yen against dollar-franc exchange rates, To take advantage of the increase in implied volatility around this time, and when volatility increases, correlations usually follow, resulting in weaknesses in all asset classes.

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