LONDON (Reuters) – A surprisingly close U.S. election contest caused the dollar to swing around in cash markets on Wednesday but derivatives market “fear” gauges showed implied currency volatility declining from multi-year highs as big bets on a weaker dollar were unwound.
Unlike in March, when the coronavirus crisis unleashed mayhem in markets, reactions were relatively contained with a 1% jerk higher in the dollar abating as vote counting progressed and diluted President Donald Trump’s early lead.
Overnight gauges of euro-dollar implied volatility had surged on Tuesday EURONO=FN to their highest levels in more than three years, and similar though less dramatic moves were seen in yen JPYONO=FN and sterling GBPONO=FN gauges.
Currency market players said expectations of a Democrat clean sweep had led many traders to place bets on the dollar falling, but the close race had fuelled a rally instead, washing out some of those trades.
“The trades that did not work were on the options side — because so many put on option trades before,” said Andreas Koening, head of global FX at Amundi, Europe’s biggest asset manager.
“It (had) looked interesting via options … but most of these strategies didn’t work.”
For example, overnight implied volatility for the euro-dollar currency pair peaked at 22% in Asian trading, before settling at 12% in London.
That is still twice the one-year average, indicating that some wariness remains. Similarly, one-week volatility EURSWO=FN fell to 9% from nearly 12% while one-month gauges slipped to 7.5% from more than 8.5%, also above average.
Traders said option market volumes were well below what was seen during the 2016 U.S. election.
“I think people definitely want to keep their powder dry for when they see a more conclusive result,” said Stuart Oakley, London-based global head of cash currency trading at Nomura.
Trump’s wins in the battleground states of Florida, Ohio and Texas confounded investors’ hopes for a clear result and the wait is on to see if he retains the so-called Rust Belt states — Michigan, Wisconsin and Pennsylvania — that sent him to the White House in 2016.
Marvin Barth, head of FX and EM macro strategy at Barclays recommended buying shorter-dated volatility gauges until a clear result emerged.
Even more broadly, a Deutsche Bank index which measures volatility in several currencies .DBCVIX slipped to a two-week low of 7.6%.
Currency funding markets meanwhile showed no sign of any rush to secure U.S. dollar funding as was seen during March. Dollar borrowing costs on the euro-dollar three-month swap market EURCBS3M=ICAP held steady at around 17 basis points compared to March highs of around 100 bps.
“There doesn’t seem to be any kind of stresses in the market or big asset allocation flows,” said Chris Iggo, chief investment officer of core investments at AXA Investment Managers.
“For the moment I think most investors are just waiting to see what happens.”
Graphic: eurovol –
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