Gauges measuring expected swings in foreign exchange markets rose on Wednesday, with one-week contracts that cover the U.S. election reaching their highest levels in nearly seven months.
Contracts for euro and Japanese yen implied volatility EURSWO=FNJPYSWO=FN versus the U.S. dollar expiring in a week climbed to their highest since early April. Similar gauges for the usually volatile pound also rose.
The contracts have nearly doubled from a day ago, in contrast to relative calm in the bond markets. That indicates traders are preparing for more volatility in currency markets than in bonds, where unprecedented central bank stimulus has crushed market volatility.
The sharp end of the currency market volatility was focused on the Chinese currency. One-week implied volatility for offshore yuan rose to a high of 10.950 on Wednesday, its highest level since Jan. 7, 2016, surpassing the previous U.S. elections in 2016.
Though Joe Biden leads U.S. President Donald Trump in national opinion polls, the race is tighter in several states where the election might be decided.
That view is being expressed in currency derivative markets. Traders are buying dollar options versus the euro and the yuan to hedge against the possibility that the Democrats will win both houses of Congress, resulting in a big fiscal package that weakens the dollar.
Benchmark one-month risk reversals for euro/dollar, a measure of the puts and calls for a currency, show demand for dollar call options -- which give traders the right to buy dollars on a future date -- has outstripped puts for the first time since June.
Even before the latest surge, currency market volatility was elevated this week as coronavirus cases proliferated and the outcome of Brexit negotiations remained unclear. But the spurt in short-end volatility indicators indicate growing concern about the U.S. election outcome.
In equity markets, the widely watched VIX index held below a June 2020 high. A gauge of bond market volatility held near one-week lows.
“We’ve got so much uncertainty ahead, from the U.S. presidential election, the second wave (of coronavirus) to Taiwan affairs,” said a trader at a Chinese bank.
Graphic: Fx market volatlity
This article originally appeared on Reuters.
