Investing.com – US election risk premiums are getting expensive in foreign exchange markets, according to Bank of America Securities, but they may actually be exaggerated.
Historically, most FX trading volumes do not generate enough to offset the implied volatility premium around the US election, analysts at the US bank said in an October 7 note. “Instead, we see contained volatility as a catalyst for FX performance after the election.”
The bank noted that a significant risk premium is being priced in foreign exchange markets ahead of the US elections, especially in emerging Asian markets.
“Here we find that the average price of the major forex pair has priced a 108% premium compared to the 2016 and 2020 average, as measured by the daily retracement in implied 2 million volume two months before the US election,” the Bank of England said.
However, the bank said that trading volumes in Asian emerging markets have not performed in the US elections since 2012, and therefore it prefers implied volumes to fade.
In a moderate election scenario, we see the spot price broadly held in the 6.85-7.30 range, and strikes at similar levels provide a sufficiently attractive premium for volume sellers, in our view.
“As a result, we believe a short strangle on USD/CNY is attractive for rich volatility premiums to evaporate. The risk to this view would be that larger-than-expected fiscal stimulus in China could generate significant volatility in USD/RMB,” the Bank of England added. Chinese.
At 04:35 ET (08:35 GMT), USD/CNY was down 0.5% at 7.0621.
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