๐Daily Market Analysis:
1๏ธโฃ USD: High Volatility Reflects Election Uncertainty
The FX options market is pricing in significant volatility for the USD, with USD/JPY displaying around 19% weekly volatility, one of the highest levels among G10 currencies. This is comparable to the fluctuations seen in mid-August when significant shifts occurred in carry trades. High-beta currencies like NOK, AUD, NZD, and SEK are also experiencing notable volatility, hinting at market concerns that a potential Trump victory could lead to broader tariffs that might impact open economies such as the Eurozone and Canada.
During Trumpโs presidency, the Canadian dollar remained relatively resilient due to the swift renegotiation of NAFTA, but this time, markets are more cautious about the USMCA deal, especially given the heightened volatility in USD/MXN, trading at around 45%. Preliminary election results from seven key U.S. states are expected between 3:00 and 4:00 am CET, potentially triggering significant market reactions. The dollar could only continue to strengthen in the event of a Republican "Red Sweep." A Harris victory would likely weaken the dollar, benefiting the euro, CAD, and AUD. Complex outcomes, like a Trump win without control of the House or a contested election, could cause further uncertainty.
The IMF recently warned that if Trump implements tariffs without offsetting tax cuts, the U.S. economy could underperform baseline projections by 1% by 2026. In light of the election dynamics, the dollar may face downward pressure unless thereโs a clear Republican win.
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2๏ธโฃ EUR: Hoping for Stability
EUR/USD has risen slightly, supported by several factors: the ECBโs cautious stance on a 50-basis-point rate cut in December, the weaker-than-expected U.S. jobs report last Friday, and better-than-expected GDP and inflation data from the Eurozone. Recent polling in Iowa also suggests that Harris might be performing better than expected, adding to market anticipation.
The FX options market is positioned for a large move in EUR/USD if U.S. election results are clear. Analysts are expected to update their EUR/USD forecasts across several quarters if results are conclusive. Since April, forecasts for the fourth quarter and beyond have been stable around 1.10. Trumpโs protectionist stance is a point of concern for European policymakers, which may prompt German officials to consider budget compromises if needed. The U.S. election results are likely to drive market movements this week. In a challenging scenarioโsuch as Trump winning without control of the HouseโEUR/USD could struggle into late 2025, as global growth might suffer without U.S. tax support, possibly pushing the ECB to further rate cuts to stimulate the Eurozone economy. ECB board member Isabel Schnabelโs comments after European markets close today will be closely watched, especially regarding potential rate cuts in December.
3๏ธโฃ AUD: Poised to Benefit from a Harris Win?
Some hedge funds in the FX options market have taken positions in AUD/USD, signaling optimism for the Australian dollar in the event of a Harris victory. This optimism stems from the expectation that a Harris administration might reduce tariff threats against China, which would benefit the AUD due to Australiaโs close economic ties with China.
Chinese markets have shown resilience thanks to recent economic stimuli, and further details on fiscal stimulus measures from China are expected this week, which could further boost growth. Additionally, the Reserve Bank of Australia (RBA) has shown little interest in further easing monetary policy. In its recent meeting, the RBA noted that core inflation remains elevated, with expectations of a slight decrease to 2.8% by year-end. Consequently, a Harris win could significantly boost AUD/USD.
