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FX Traders Brace for Wild Moves After US Election

AInvestTuesday, Nov 5, 2024 4:53 am ET
2min read
As the 2024 US presidential election approaches, currency traders are bracing for significant market volatility. The closeness of the race between Republican nominee Donald Trump and Democratic candidate Kamala Harris has sparked uncertainty, driving up volatility indices. The election's potential influence on trade policies could exacerbate long-term currency market volatility, with Trump's protectionist stance and Harris's multilateral approach offering contrasting outcomes.

The US election on November 5, 2024, is expected to trigger sharp price swings in the forex market, with the US dollar (USD) playing a central role. The outcome of the election could significantly influence the value of the USD relative to other major currencies in the short term. If Trump wins, his protectionist trade policies and potential tax cuts could strengthen the USD initially, but higher deficits and inflation risks might weaken it later. A Harris victory, on the other hand, could lead to stable trade relations and multilateral negotiations, reducing currency volatility and maintaining investor confidence in the dollar.


Key currencies expected to experience significant volatility in response to the election results include the Mexican peso and the euro. The Mexican peso's one-week volatility is at 44%, close to four times what it was at the time of the 2020 US election. Euro overnight implied volatility surged to 26.4%, its highest since the 2016 US election. This volatility reflects demand for protection against very near-term price moves, highlighting the uncertainty surrounding the election.


The election's impact on trade policies could influence currency market volatility in the long term. Trump's protectionist stance, including threatened tariffs on key trading partners like China and the EU, could disrupt global supply chains and cause significant currency fluctuations. Harris, on the other hand, supports multilateral trade agreements, which could stabilize currency markets. However, the market's reaction to policy changes will depend on various factors, including economic growth, inflation, and Federal Reserve policy.

To hedge against currency market volatility in the aftermath of the US election, investors can employ several strategies. Forward contracts, options contracts, and diversification of revenue streams are some key hedging strategies. Forward contracts allow businesses to lock in exchange rates for future transactions, providing protection against adverse currency movements. Options contracts offer flexibility, enabling businesses to hedge downside risk while maintaining the opportunity to benefit from favorable currency movements. Diversifying revenue streams across multiple currencies and regions can also help reduce reliance on any single market or currency, acting as a natural hedge against currency fluctuations.

In conclusion, the 2024 US presidential election is poised to significantly impact currency markets, with traders bracing for wild moves as results trickle in. The closeness of the race between Trump and Harris has sparked uncertainty, driving up volatility indices. The election's potential influence on trade policies could exacerbate long-term currency market volatility. Investors should remain vigilant and consider implementing hedging strategies to mitigate risks associated with currency market fluctuations.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.