With an exceptionally close US election upon us, plus the outcome likely to deliver a binary impact on currency markets, the FX options market is trading at a respectful level of volatility. In absolute terms, USD/JPY trades on the highest one-week volatility in the G10 space near 19%. These are close to levels seen during the height of the carry trade unwind in early August this year. With the next highest one-week volatilities come the typical high-beta currencies of NOK, AUD, NZD and SEK.
However, looking at ratios of traded volatility to realised volatility it is EUR/USD, USD/CAD and AUD/USD which stand out. For example, EUR/USD one-week volatility trades at 2.2 times its realised volatility. We think this makes sense and reflects the view that a Trump 2.0 would not merely punish China with tariffs, but also pursue universal tariffs which would very much hit open economies like the eurozone and Canada. The Canadian dollar had quite a good Trump 1.0 since the NAFTA trade deal was renegotiated quickly. The market is more fearful of the USMCA trade deal this time around – as evidenced in USD/MXN one-week volatility trading at 45%!
Polls in the seven swing US states close around 03/0400 CET tomorrow morning and we would expect markets to be moving around that time. Given the run-up in the dollar in October, we think we need to see a Red Sweep for the dollar to push on much further. A Harris win would seem a benign outcome and prove a dollar negative – those three currencies: the euro, the Canadian and the Australian dollars could do well here. The more difficult outcome for the market would be Trump without the House of Representatives or a contested election. IMF analysis in its recent World Economic Outlook warned that the US economy could be 1% weaker than baseline in 2026 if Trump delivers on tariffs but could not offset it with tax cuts. For this reason, and given market positioning into the election, we think the dollar could come lower unless there is a Red Sweep.
Ahead of the election, today’s US data calendar has ISM services for October. This is expected to soften a little. And were it not for the election, we believe this week’s Fed meeting would also prove dollar negative too.
Chris Turner