Currencies Offer Clues on Trump Versus Clinton as Election Nearsby and
History shows volatility gauges may climb to reflect risk
Foreign exchange is bellwether for pound on Brexit, Scotland
Look to the currency market for an early reading on the U.S. presidential election.
Six-month options-based measures of exchange-rate volatility now include the Nov. 8 vote, offering traders a way to express views on the outcome, or to hedge against price swings. While neither major political party has formally chosen candidates, Donald Trump is the presumptive nominee for Republicans while Hillary Clinton is in the lead to gain the Democratic nod.
History shows currency markets are often an early bellwether for investor concern surrounding political risks. A three-month gauge of fluctuations in sterling versus the dollar jumped the most since 1998 in March, exactly three months before the British referendum on leaving the EU. A one-month measure of pound volatility also soared in the run-up to Scotland’s vote on splitting from the U.K.
“Markets will just naturally turn to the election,” said Greg Anderson, global head of foreign-exchange strategy at Bank of Montreal’s BMO Capital Markets Corp in New York. "If the election is Nov. 8, the hedging activity would occur late July, early August, through the end of August."
A six-month measure of volatility for the dollar versus the euro climbed the most in a month last week to 9.8 percent. A similar measure for the greenback versus the currency of Mexico, which Trump has threatened to cut off from the U.S. with a wall, rose to the highest since February.
Increasing odds of a Trump presidency may push the dollar higher, Anderson said, noting Trump has said that he would replace Fed Chair Janet Yellen and might bring on a substantially more hawkish Fed, increasing the outlook for interest-rate increases. Trump has also promised to introduce corporate tax cuts which would add to dollar strength, Anderson said.
November’s vote may be “a 2008 election volatility redux on steroids,” Harley Bassman, a money manager in Newport Beach, California, at Pacific Investment Management Co., wrote in March. In the run-up to the 2008 vote, implied volatility for options on Group-of-10 currencies increased more than before any other presidential election since at least 1992, he said.