The election is creating a climate of anxiety across markets which is translating itself into growing volatility.
As you may have heard, there’s a bit of an election going on in the US. As usual the markets are looking at this closely, but while all elections impact the FX market, this is an election like no other and the markets have been jittery.
Every major vote will have an impact on the foreign exchange market. Markets hate the kind of uncertainty which is part and parcel of any election. Before the Brexit referendum, for example, Sterling rose in anticipation of a ‘remain’ vote before tanking amidst the shock as Britain voted to leave.
The markets have been even more volatile than usual this time around. The Dollar index dipped amid election concern as well as a number of other downward pressures such as the rise in COVID 19 cases, a high debt to GDP ratio, rising unemployment and low interest rates.
However, things have levelled out as the prospect grow of a win for Biden as well as Democrat control of both Senate and Congress. The Fivethirtyeight blog, which has been one of the most accurate polling predictors, currently gives Biden a 90% chance of victory.
Volatility for longer dated options, often seen as an indicator of perceived risk, is falling suggesting the market is becoming increasingly confident of a Biden win. Emerging markets are also looking strong as the South Korean won, Mexican Peso and Chinese Yuan all making gains against the dollar.
The changes represent a believe that geopolitical tensions which have marked the Trump administration might lessen with a change of leader.
Bit by bit the markets are starting to feel more comfortable, but that doesn’t mean the end of choppy waters.
There is of course the inherently unpredictable nature of Donald Trump. He has previously suggested he could contest the election if he loses. There are various convoluted scenarios in which he could fight the result and even circumvent the electorate to get himself back into the White House.
Even if he doesn’t, the markets will still have to cope with a transition period which may prove to be more volatile than usual with Trump trying to make the best use of the time he has left. Add to that the natural uncertainty which comes with a new administration and there is plenty of reason to expect more volatility in the future.
Such an environment creates both opportunities and risks. For those who judge the market right, there are considerable benefits to be had. Equally, those who find themselves on the wrong end of market moves could take a considerable hit.
At times of FX volatility, especially one as highly charged as this, it pays to have an FX partner who understands the market inside out and is best placed to help you navigate these choppy waters.