FBI’s October surprise shoves US vote on top of risk list for foreign currency markets

Bets on a victory by Hillary Clinton over rival Donald Trump drop

PUBLISHED : Wednesday, 02 November, 2016, 1:27am
UPDATED : Wednesday, 02 November, 2016, 1:27am

The US presidential election is back at the top of currency traders’ list of worries.

After the revelation last week that the Federal Bureau of Investigation is reopening its inquiry into Hillary Clinton’s use of private e-mail, implied volatility in two-week options in the dollar-yen exchange rate timed to the November 8 vote climbed to the highest levels since September, according to data compiled by Bloomberg.

The foreign-exchange market had been looking past the campaign, putting greater emphasis on global central-bank meetings in December, when the Federal Reserve is forecast to raise interest rates.

Sentiment in the currency market shifted after the FBI’s October 28 announcement shattered a period of relative calm. Investors had been betting a likely Clinton victory would prompt the US to uphold global trade agreements denounced by rival Donald Trump, who has also called for tighter immigration controls. C

Clinton’s odds of victory have fallen to 75.6 per cent, according to poll aggregator FiveThirtyEight, from 81.6 per cent last week, while traders on online betting market PredictIt give Clinton an 71 per cent chance of winning the election, compared with 81 per cent on October 19.

“There will be some volatility before the election and the market may get a bit nervous, especially if it’s a very close one,” said Ugo Lancioni, a money manager in London at Neuberger Berman Group LLC, which oversees about $250 billion. “The market still believes Clinton is going to win, but that may change.”

The increased likelihood of a Trump win helps to explain why the JPMorgan Chase & Co. global currency volatility index rose Monday by the most in two weeks, after falling to the lowest level this year on a closing basis on October 24.

Implied volatility on two-week options on the dollar-yen pair was 11.6 perc ent, up from 8.9 per cent last week. That on two-month options timed to the December central-bank meetings is 11 per cent, below the 2016 average of 11.7 per cent.

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Investors speculate a win by Democratic nominee Clinton would mean support for Asian and European trade deals and the independence of the Fed, while a win for her rival may mean a material shift in policies.

Republican nominee Trump included several trade elements in his list of actions that he would take during the first 100 days of his presidency, including a plan to renegotiate the North American Free Trade Agreement and directing his Secretary of the Treasury to label China, the biggest foreign holder of US Treasuries, a currency manipulator.

Implied volatility for the currency pair most closely tracking the election outcome is also taking a similar view. Expected swings for two-week options on the dollar-Mexican peso pair climbed to about 28 per cent around the US elections, according to Bloomberg data, from 12.5 per cent last week.

Investors “don’t want to get into the election and have a Brexit happen,” said Andres Jaime, a foreign-exchange strategist in New York at Barclays Plc, referring to the UK vote in June to leave the European Union. “That’s why the market is being a bit more cautious.”

Others are downplaying the election risk and are focused on central-bank meetings at year-end. Implied volatility on two-month options on the euro-dollar, the world’s most-traded currency pair, is 8.3 per cent, up from a low in August of 7.1 per cent.

“The markets are downplaying the possibility of a US election victory for Trump and are looking toward the Fed announcement” in December, said Samir Sheldenkar, an investment partner in London at Harmonic Capital Partners, with US$1.8 billion under management.

Futures show a 71 per cent chance the US central bank will raise rates by year-end, up from 59 per cent a month ago, based on the assumption the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase. The anticipation pushed a gauge of the dollar to the highest levels since March last week.

With just a week to go before the White House vote, traders will remain on edge as they re-calibrate expectations for a Clinton win and brace for any additional surprises.

“Uncertainty is increasing because the odds are tightening,” said Van Luu, head of currency and fixed-income strategy in London at Russell Investments, which has $244 billion under management. “A Trump victory has the potential to cause exchange rates to break out of the range. In the case of a Clinton victory, the focus will shift back to central-bank policy.”