There are generally two waves of vol buying into watershed events like Brexit and market-moving elections. A short discussion of that pattern. Plus, the AUD chart.
This is the amount of water on Earth, relative to Earth itself
(full image at bottom of page)
Flat
167 days from now, the United States will hold a presidential election. On some timeline in the multiverse, this event will feature a well-respected, naturally tanned intellectual known for his consistently ethical approach who avoids any appearance of criminality battling respectfully against a young, effective leader widely admired for his oratory capabilities, sane fiscal policy, pro-crypto stance, and an exemplary son who uses desktop computers only, never laptops.
In the timeline that you and I live in, it looks like this.
I just put this chart in here because I had not realized that Trump had built such a huge lead over Biden this month. So maybe you didn’t realize it either. The chart above comes from electionbettingodds.com, a site that aggregates the live gambling odds from sites like PredictIt and BetFair. The current win probabilities are 52% for DJT and 40% for JRB. While it’s still a bit too early to gameplan how to trade FX options for the election, timing events like this involves multiple sources of error and too early can be just as bad as too late.
The runup into Brexit and the 2016 election both feature the same two-stage model of panic. There is an initial UH OH two or three months before the event and then another panic right before the event. I think the first wave comes from specs and hedgers buying options, then there is some mean reversion, then the second spike is last second unconditional buyers of vol who encounter risk-averse option desks unwilling to take unlimited, hard-to-measure event risk as risk managers hover behind them. I’m using 6-month because the series is not distorted by the event not being in the contract for a while, then being part of the contract.
Another good example is the runup into the Scottish Referendum in 2014.
Again, you see (a more muted version of) a pattern where there are two rounds of vol buying. Obviously, the behavior of volatility is related to the moves in the polls. The gigantic panic in 2014 was triggered by an abrupt narrowing of the polls, for example. Still, there is an underlying logic to the evolution and timing of:
Based on these examples, one might expect USDCNH vol to go up starting in August, mean revert to make a low in early October, then rip higher into the election. Given USDCNH doesn’t move very much, it’s not a bad idea to consider doing calendar spreads like sell 15AUG24 and buy 15DEC24, etc. While a Trump victory is hard to handicap in G10 because tariffs are bullish USD and Fed neutering is bearish USD… A Trump victory should be unambiguously negative for CNH.
Canada CPI came in on the screws, pretty much, so my USDCAD option expires worthless and the EURCAD is a tiny loss. Mutant USD strength today is causing frustration and consternation for AUD longs in particular and that pair is getting right back to where it started pre-CPI. Going into the CPI release, AUDUSD was 0.6633. After the release, it went 0.6680 paid and then right back down to a low of 0.6629. As such, I consider 0.6630/50 to be a critical pivot in AUD.
You can see that 0.6630/50 has been epic as it was the quadruple top and the neckline of a huge inverted Head and Shoulders pattern. Now, all hope for AUD bulls rests on that thin red line.
You can add “Target Underwhelms” to the list of concerning data points on the consumer. Watch housing today. While housing data has been irrelevant for eons, I think we should be much more focused on the demand side of the economy now as jobs growth slows, excess savings have been spent, credit card delinquencies are rising, and consumer weakness appears in earnings reports and Retail Sales figures.
In six months, we are going to look back at 4.87% 2-year yields and wish we locked in.
Have a liquid day.
https://www.usgs.gov/media/images/all-earths-water-a-single-sphere
This image shows blue spheres representing relative amounts of Earth’s water in comparison to the size of the Earth. Are you surprised that these water spheres look so small? They are only small in relation to the size of the Earth. These images attempt to show three dimensions, so each sphere represents “volume.” They show that in comparison to the volume of the globe, the amount of water on the planet is very small. Oceans account for only a “thin film” of water on the surface.
A sort of almost unbelievably large move in Brazil. Plus: Short CADJPY.
