One week left to the US election and Biden is still well ahead in the polls. The polls shows a Biden victory as very likely, while the betting market got a Biden victory priced a bit lower and have a full Biden sweep at around 50% probability.
Event risk for the election has changed small since our last market update related to the election done on 8 October. EURUSD O/N forward vol for the election is currently 22 vol compared to 23 vol on 8 October. USDJPY currently trades at 24 vol compared to 27 on 8 October while USDCNH is priced a bit higher, 23 vol vs 20 vol on 8 October.
With both polls and the betting market having Biden as a clear winner the surprise, and at least short-term big moves, will be if Trump win the election. A Trump victory will be dollar positive and we will see largest moves against EM, like CNH and MXN.
It is unsure if we can get a clear result already on the election night with the large amount of mail votes this year due to the Covid virus. Therefore, any long options strategies are recommended to be 2 weeks or longer to cover any delay in the result of the election.
USDCNH has traded lower over the last months and we have seen USDCNH risk reversals trade higher despite spot grinding lower. We have had another spike higher in the risk reversals over the last days as spot has corrected higher, see graph above. At-the-money vols have also been market higher with 1 month up 0.5 vol today and almost 1.0 vol over the last week.
EURUSD 1 month is up 0.2 vol today and same seen over the last week. The risk reversal been trading relative stable over the last month with 1 month RR currently trades at 0.3 for calls which is close to the mean seen over the last month.
When hedging against a Trump victory and buying USD calls, EURUSD puts offer good value due to the discount you get from the risk reversal which trades favor EURUSD calls. USDCNH calls on the other hand is very expensive due to both the high at the money vol and the elevated risk reversal. From a vol perspective hedging against a Trump victory in USDCNH by buying spot and hedge the spot with a USDCNH put or buying a call spread offer best value.
Buy 2 week 1.1700 EURUSD put
Cost 44 pips
Spot ref.: 1.1815
Buy USDCNH spot
Buy 2 week 6.6500 USDCNH put
Cost 242 pips
Buy 2 week 6.7200 USDCNH call
Sell 2 week 6.8000 USDCNH call
Cost 280 pips
(the 2 week 6.7200 cost 482 on its own)
Spot ref.: 6.7010