(Bloomberg) -- A gauge of expected yuan swings is hovering around the highest in nearly two years as traders brace for the risk of tariffs on Chinese exports if Donald Trump wins the tightly contested US Presidential race.
The implied dollar-offshore yuan volatility over a one-month period stayed close to the highest since December 2022. The gap between that and a two-week gauge widened the most in data going back to 2011, in a sign that traders are expecting the Nov. 5 US elections to stoke wild market swings.
As state-by-state polls show essentially a neck-and-neck race between Trump and his Democratic rival Kamala Harris, yuan traders are assessing which of their policies may impact China the most. While Harris hasn’t signaled any major change in trade policies, Trump is backing a baseline levy of 20% on all imports and as much as 60% tariffs on Chinese goods.
“Trump’s rating in the polls, notably in the six key swing states has picked up – certainly enough for market players to increase tariff hedges and trade expressions,” Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note on Monday. “We observe that most prominently in the options space, with increased demand for one-month volatility in dollar-yuan, dollar-Mexican peso and to a lesser extent in euro-dollar.”
Nervousness in China’s currency market over a possible Trump presidency isn’t without precedent. During his previous term of office, his policies — especially tariffs on Chinese exports — helped drive the yuan to what was its weakest in a decade in August 2019.
Such levies hurt the yuan because they undermine the competitiveness of Chinese exports, resulting in lower capital inflows in the form of trade surplus.
The onshore yuan came under pressure on Tuesday as it fell as much as 0.5% to 7.1223 per dollar, the weakest in almost a month. Exporters were more cautious of selling dollars amid the risk of a Trump presidency, according to traders who asked not to be identified because they aren’t authorized to speak publicly.
“Historical polling errors mean we fade Harris’ lead in the polls,” said Peter Branner, chief investments officer at abrdn Plc. “Trump would mean higher yields, higher inflation, stronger dollar and an ambiguous impact on equities. Portfolios need to consider and manage these risks.”
US elections are driving up currency volatility elsewhere too, with one-month gauges for the euro, Mexican peso and broader dollar all up on Monday. The gauge for Taiwan dollar is hovering around highest since 2022.
--With assistance from Chien-Hua Wan and Ran Li.
(Updates with yuan prices and market color from traders in the 7th paragraph.)
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