(Bloomberg) -- The relative cost of hedging the euro in the run-up to the US presidential elections is the most elevated in seven years as polls suggest voting will go down to the wire.
A key options-market measure — based on how much wider currency swings are expected to be in the future compared with now — hasn’t been this high since the turbulent 2017 French elections, which some feared would scupper the common currency. A positive number for the so-called relative premium indicates hedging costs are overpriced.
Investors are buying protection due to the differing interest-rate trajectories in Europe and the US. With the euro-zone’s economic weakness spurring bets for steeper cuts by the European Central Bank, investors are betting a possible Donald Trump presidency would reignite inflation — meaning higher Fed rates and more gains for the greenback.
Implied volatility — a measure of future currency swings — had its eighth-largest daily advance on Wednesday since the European sovereign debt crisis. That was the day options bets for the currency two weeks out first captured the upcoming US vote. The move was also among the widest 25 on record.
Beyond the elections, traders are preparing for the Federal Reserve’s policy decision on Nov. 7. According to data from the Depository Trust & Clearing Corporation, the market is positioning for a move down to $1.05 should the dollar rally resume, while market analysts see the risk of a move all the way down to parity.
The common currency fell to $1.0761 this week, the lowest in more than three months. So-called risk reversals show traders are most bearish the euro since early July.
NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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