November 05, 2024

“The market has begun to price in levels of FX volatility not seen since the peak of the pandemic uncertainty four and a half years ago. With the two candidates neck-and-neck, this is as binary as a market event gets, and a Trump win could lead to elevated volatility in the longer term.”

Sam Cornford – Head of Trading

USD

The US election is finally here, and the markets are poised for some enormous one-day moves. The polling averages are neck-and-neck, the betting markets have moved closer to a coin flip, and the impact on FX is going to be sharp in one direction or the other. Look for a dollar rally if Trump wins, with CHF and JPY taking the smallest hits, while the low-liquidity G10 (NOK, SEK, AUD, NZD), CNH, and EUR suffer the most. If Harris is called the winner, simply expect the opposite. In Europe, we can expect the first results to trickle through in the early hours of Wednesday, but it could be days – or in the extreme volatility case, weeks – until we know the winner. Volatility expectations are extremely elevated. Overnight implied volatility for EUR/USD is the highest since the peak of the Covid crisis in March 2020, and for USD/CNH we are hovering around a record high. AUD/USD and NZD/USD are the pairs with the biggest anticipated potential for movement in the G10, followed closely by USD/NOK and USD/SEK.

While the election might dull any market reaction, the ISM services PMI this afternoon will be consequential for the Fed decision on Thursday, particularly if Harris wins and the macro story becomes the market’s main priority once again.

GBP

Sterling has inched back closer to the 1.30 mark this week, thanks mostly to Harris’ building momentum in the polls over the weekend. GBP/EUR is glued to 1.19, however, as it seems that few are willing to take on any new positions ahead of the US election result, even on the crosses. While elevated, GBP/USD overnight implied volatility is materially lower than for EUR/USD, suggesting that the market generally sees the euro as more exposed to the result. There is a final services PMI print this morning for the UK, but the focus is likely to be solely on the US.

EUR

The euro has softened overnight after taking a peek above 1.09 yesterday for the first time since early October. As discussed, the post-election moves in the euro are likely to generate some of the biggest headlines. Forecasts vary significantly, but Trump’s tariff plans would be expected to shave somewhere in the region of 0.5-1.5% off eurozone GDP. This means that you get both: a) higher Treasury yields, lower risk appetite, and stronger desire to hold the dollar, and b) weakened eurozone growth and potentially an even quicker ECB easing cycle as a result. That toxic mix underpins the more extreme calls that see EUR/USD returning to parity under a Trump sweep scenario. At the same time, a Harris win means that the resolution of uncertainty and an unwind of the pre-election Trump positioning can lift the lid on a euro recovery.

Markets

Yesterday saw a modest drop across most of the major indexes as traders trimmed a bit of risk ahead of today’s US election. Few will be prepared to put on any major bets until the election results begin trickling through, at which point we can expect some significant sector-specific moves, depending on who the winner favours.

Main Economic Events (All Times CET)

4:30am: Reserve Bank of Australia Rate Decision
4:00pm: US ISM Services PMI
10:45pm: New Zealand Employment Change
US Presidential Election

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