Options markets showed a edged boost in implied volatility, especially as the options term included the upcoming US election.

Currencies such as the Euro (EUR), Australian Dollar (AUD), New Zealand Dollar (NZD), Mexican Peso (MXN) and South Korean Won (KRW) have seen significant increases in volatility.

According to Standard Chartered (OTC:) analysts, the most significant percentage increases in implied volatility were observed for the Chinese yuan (CNH), Mexican peso (MXN), euro (EUR), South Korean won (KRW) and Singapore dollar (SGD).

Currency risk in the wake of the US elections

Investors are closely monitoring the potential currency risk related to the US elections, analyzing the boost in implied volatility over a one- and two-week horizon. The boost underscores greater focus on depreciation risks, especially as odds on President Trump winning fluctuate in betting markets.

The observed changes began a few days before the one- and two-week option windows, and the noticeable movements occurred around October 22 or 23, minimizing the likelihood that these changes were merely coincidental.

In terms of two-week implied volatility, the largest increases were seen for the currencies of Mexico, South Korea, South Africa, China, Japan, Australia, Europe and New Zealand. While there is greater confidence in the movement of two-week implied volatility as an indicator, one-week volatility signals are expected to gain strength as the week progresses.

Meanwhile, the Indian rupee (INR), Chilean peso (CLP), Colombian peso (COP), Israeli peso (ILS) and Canadian dollar (CAD) were among the least affected.

The marked boost in implied volatility of the Singapore Dollar (SGD) was particularly noticeable, especially as other currencies with similar volatility profiles did not show comparable increases. Latin American currencies, excluding the Mexican peso, and some Asian currencies that are expected to be impacted by tariffs on China appear to be less affected by election-related volatility.

Compared to the 2016 and 2020 elections, the boost in implied volatility has been more significant this year, signaling market uncertainty about both the election outcome and the subsequent political agenda, especially if President Trump wins. That uncertainty extends to whether the outcome will lead to a reshuffle or division of Congress.

In terms of spot market movements, the Bloomberg Dollar Spot Index (BBDXY) is up 1.5% since mid-October. It is possible that most of this boost will be reversed if the election results do not indicate the adoption of extreme policies.

AUD, NZD and JPY, which have been the weakest G10 currencies over this period, could see a turnaround in both spot and volatility terms if the consequences of the elections prove to be less severe than currently priced in by volatility markets.