U.S. election risk ripples through Mexican peso options
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U.S. ELECTION RISK RIPPLES THROUGH MEXICAN PESO OPTIONS
The U.S. election now falls within the scope of one-month currency options contracts, whichsuggest that when it comes to tariff-target currencies, the Mexican peso is in for a bigger shock than China's heavily-managed yuan.
One month implied volatility for the dollar/Mexican peso pair MXN1MO= is now above 20, having been under 15 until late last week, the highest amongst major developed and emerging market pairs.
A higher number in the implied volatility gauges, which are derived from options prices, mean investors expect bigger moves in a security, in either direction.
In contrast, implied vol for the dollar vs China's yuan is around 6, up from just under 5 on Oct. 1, before the one week national holiday. CNY1MO=
"The fault line of US tariffs runs across both the economies of Mexico and China, but the divergence in volatility levels tell its own story of how investors rate the tail risks," said Societe Generale analysts in a Wednesday note.
This is partly based on history. After the election in 2016, the yuan fell around 3% compared to a roughly 12% slump in the peso, by Soc Gen's sums.
"Active intervention by the PBOC ($3.3tn FX reserves) and state-owned banks partly explains why implied vol in the yuan ranks well below the peso ($273bn reserves)," they write. The PBOC is the People's Bank of China, the country's central bank.
Among G10 currencies, implied volatility is highest for dollar/yen, though it has changed little since last week, while the pound and euro have seen small jumps. JPY1MO=, GBP1MO=, <EUR1MO=
(Alun John and Harry Robertson)
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Volatility in the peso jumps ahead of U.S. election https://reut.rs/3YgPjNW
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