Wall Street says we need to have some kind of hedge before the election

Investors can consider hedging only if the election is wrong.

Global financial markets are increasingly appreciating the idea that Democratic contender Joe Biden will not only oust President Donald Trump in next month’s US election, but also have a friendly congress. U.S. stocks and treasury yields rose with the prospect of the Biden administration introducing a greater fiscal stimulus as the dollar fell and measures of implicit market turbulence – backed in part by US central bank support – were subdued. Yet, while opinion polls in both national and critically changing states lead Biden, the memory of the shocking outcome of the 2016 presidential election is a warning.

Volatility markets “may have become too complacent,” according to Ladislav Jankovic, a global currency derivative strategist at JPMorgan Chase & Co. This background, combined with favorable volatility prices, “makes it reasonable to place cheap hedges,” I said.

The word cheap is key. Although Trump is likely to win, the most likely result – at least based on polls – is that he will lose, and therefore investors may be reluctant to pay too much a premium to protect themselves from the so-called risk queue.

With this in mind, Jankovic and his colleagues recommend optional bets that can take advantage of US dollar winnings.

Biden’s victory is seen by many observers as more negative for the dollar, fueled in part by expectations that it will provide a larger package of fiscal stimulus and that the resulting debt could weigh on the currency. This can also help boost investor sentiment about risk and appetite for asylums like the dollar. Trump’s upset victory, on the other hand, could help increase greenbacks.

According to JPMorgan, option strategies based on dollar bets usually perform better after Hillary Clinton’s surprise loss in 2016 than other “risk constructs”, such as those involving the euro or yen.

This time, they say, using betting options that the dollar will climb against its Australian counterpart looks best, while similar bets on a declining offshore yuan are also worth considering. This is because the Australian’s spot price does not have to move as much as its peers to trigger the option, while the renminbit is in focus amid China’s trade dispute with the United States.

Source: Bloomberg Pro Terminal

Chart: Used with permission from Bloomberg Finance L.P.