"Currency Traders Bet on Market Volatility Returning With Trump"

" Currency Traders Bet on Market Volatility Returning With Trump \r\n \u00a0Currency traders are betting that Donald Trump\u2019s policy agenda is about to jumpstart volatility in the $7.5 trillion-a-day foreign exchange market. \r\n After years of benign moves, a gauge of one-year volatility on the euro-dollar exchange rate surged after the election. Hedge funds are scooping up options contracts that pay out if currency swings increase and strategists have dramatically revised their currency forecasts. \r\n While it\u2019s not yet clear how quickly Trump will implement policies such as trade tariffs that could cause significant pain to currencies like the euro, investors are pretty certain that unpredictability will be a major feature of his term in office. There\u2019s also the unknown factor of how countries will respond to Trump\u2019s measures and what impact those countermeasures will have on markets. \r\n \u201cIt\u2019s an environment where FX becomes particularly interesting,\u201d said Julian Weiss, head of G-10 vanilla FX options at Bank of America, adding that demand for longer-term products has picked up. \u201cAny hedge fund across the globe, even if they have an equity focus, all of a sudden we\u2019re seeing FX exposure being put on.\u201d \r\n The trend marks a sharp turnaround from the past few years when central banks raising and then cutting interest rates in tandem ushered in a period of extreme calm. Now, with Trump\u2019s America First policies expected to fuel inflation at home, traders expect a widening policy gulf between the Federal Reserve and its peers, which will break major currency pairs like the euro-dollar out of their tightest range in years. \r\n Banks have slashed their forecasts for the currency pair in the wake of the US election, anticipating a slide toward parity. \r\n \u201cWe would expect Trump\u2019s likely policies to create greater room for macro-economic divergence, which would lead to bigger FX moves,\u201d said Dominic Bunning, head of G-10 strategy at Nomura. \r\n Market projections for a stronger dollar under Trump also support the case for elevated hedging costs because correlation between the greenback and volatility is at its strongest when the US currency is in high demand. \r\n Options traders at NatWest Group Plc say activity has been particularly concentrated around bets on euro, Aussie dollar and yen moves versus the dollar, while traders at UBS Group AG note that wagering on Chinese yuan weakness has also been a popular play. \r\n \u201cCurrencies with the greatest perceived exposure to tariffs and Trump\u2019s policies will continue to be favored from a volatility perspective,\u201d said Henry Drysdale, co-head of currency options trading at NatWest. \r\n Of course there\u2019s a risk that much of the expected turbulence gets so baked in to market pricing in the run up to Trump\u2019s inauguration that swings in the longer term turn out to be softer than expected. That\u2019s broadly what happened during Trump\u2019s last presidency, partly because policies like trade tariffs ended up taking longer than expected to be implemented. \r\n This time round, Republican control of the House and the Senate may mean that policies get implemented harder and faster. Then there\u2019s the wild card of day-to-day currency moves in response to regular Tweets from the president, a state of affairs that traders remember all too well from his last term in office. \r\n \u201c2025 will be a year of volatility and uncertainty,\u201d said Shahab Jalinoos, global head of currency research at UBS. \u201cWe don\u2019t yet know what till transpire under Trump and there are so many crosscurrents.\u201d "

"Currency Traders Bet on Market Volatility Returning With Trump"

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