Currency market volatility jumps before U.S. election

[October 28, 2020]  LONDON (Reuters) - Gauges for implied currency swings in the foreign exchange markets jumped to their highest levels in nearly seven months on Wednesday as traders anticipated more volatility before the outcome of the U.S. elections next week.

Contracts for euro and Japanese yen implied volatility <EUR1WO=R> <JPY1WO=R> versus the U.S. dollar expiring in a week climbed to their highest since early April.

The contracts have nearly doubled from a day ago, in contrast to relative calm in the bond markets, indicating traders are increasingly preparing for more volatility in currency markets than in bonds, where unprecedented central bank stimulus has crushed market volatility.

The sharp end of the currency market volatility was focused on the Chinese currency. One-week implied volatility for offshore yuan <CNHSWO=> rose to a high of 10.950 on Wednesday, its highest level since Jan. 7, 2016, surpassing the previous U.S. elections in 2016.

"We've got so much uncertainty ahead, from the U.S. presidential election, the second wave (of coronavirus) to Taiwan affairs," said a trader at a Chinese bank. Markets have largely priced in a Biden presidency, the trader said, but the outcome of the election remains uncertain.

Though Democrat Joe Biden leads U.S. President Donald Trump in national opinion polls, the race is tighter in several battleground states where the election might be decided.

Currency market volatility remains elevated this week as coronavirus cases proliferate and the outcome of Brexit negotiations remain unclear. But the spurt in short-end volatility indicators indicate growing concern about the U.S. election outcome.

In equity markets, the widely watched VIX index <.VIX> held below a June 2020 high. A gauge of bond market volatility <.MOVE> held near one-week lows.

For a graphic on Fx market volatlity:

https://fingfx.thomsonreuters.com/
gfx/mkt/gjnpwlrwlvw/Fx%20market%20volatlity.JPG

(Reporting by Saikat Chatterjee, Elizabeth Howcroft in London, Andrew Galbraith and Winni Zhou in Shanghai; diting by Tom Arnold, Larry King)

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