What Should Forex Traders Expect from U.S. Election Volatility?

Forex traders are ready for more volatility in the FX markets as the 2024 US presidential election approaches. The euro and Mexican peso, both extremely susceptible to U.S. political outcomes, have suffered a large increase in options volatility—levels not seen since 2016.

As Vice President Kamala Harris and former President Donald Trump continue embroiled in a close contest, opinion surveys indicate that the ultimate conclusion may not be established right away. Both candidates represent dramatically different economic policies: Trump's approach might include tax cuts, tariffs, and inflationary pressure, which would likely raise bond rates and enhance the US currency, while Harris is considered a supporter of continuity.

The euro's overnight implied volatility has reached 26.4%, its highest level since Trump's surprising win in 2016. Similarly, the Mexican peso's overnight volatility surpassed 87%, the greatest since November 2016. Analysts believe that this significant volatility reflects the market's uncertainty, with traders choosing to be cautious until election results are released.

Monex Europe analysts remarked that the tight nature of this election has resulted in a cautious trading environment. They anticipate that price activity will stay modest until clearer conclusions are revealed.

Beyond election night, market experts expect further turbulence in the coming weeks. The euro's one-week implied volatility has risen to 13.06%, the highest level since March 2023, when Credit Suisse collapsed and rattled global markets. The peso's one-week volatility has hit 44%, a level last seen during the March 2020 COVID-19 crisis.

Other US trade partners' currencies have also become more volatile. Trump's campaign pledges included prospective tariffs on China and other major economies, which fueled market anxiety. The one-week implied volatility for the offshore Chinese yuan reached 14.45%, up from 2.5% only a week earlier. The Canadian currency, which is equally subject to US policy swings, had a one-week options volatility increase to 8.5%.

ING strategists point out that the considerable rise in implied volatility, particularly for the euro and Canadian dollar, highlights market fears over Trump's likely second term. According to ING's Chris Turner, Trump's policies might result in tariffs not just on China, but also on other open economies such as the eurozone and Canada.

Final Thoughts

The 2024 presidential election in the United States is expected to have far-reaching ramifications for the FX market. As the globe waits for the final verdict, FX traders and experts brace for a potentially volatile time defined by increased volatility. It remains to be seen if the ultimate victor will bring stability or more uncertainty, but one thing is certain: markets will be keeping a careful eye on developments in the coming weeks.