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Despite the volume of noise that has so often accompanied them, American elections have historically had very little impact on currency markets.

This year could be slightly different. Donald Trump appears committed to doubling down on the protectionist impulses that defined his first term, threatening to implement a 10-percent “universal baseline tariff” on imports from all US trading partners.

We don’t expect traders to take directional positions this far from election day, but we do worry that market participants are failing to anticipate a rise in uncertainty. Volatility term structures – which measure the cost of insuring against big moves in the euro, Canadian dollar, and Mexican peso over time – remain relatively untroubled, with only modest kinks around the election date. 

Long-term fundamentals may remain somewhat stable after the election, but it seems reasonable to expect several bouts of risk aversion to hit in the coming months, with implied volatility spiking around November’s option expirations whenever the political rhetoric reaches a new tempo. 

John Maynard Keynes once said “Successful investing requires anticipating the anticipation of others”. Currency hedgers might want to think along similar lines. 

Volatility term structure: implied volatility by expiry month, %

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