(Removes incorrect reference to three-month euro-dollar swaps
hitting 150 bps in March, previously in paragraph 15)
By Saikat Chatterjee
LONDON, Oct 28 (Reuters) - Equity and currency volatility
shot higher on Wednesday and the cost of sourcing dollars rose,
reflecting fears that the U.S. election and resurgent COVID-19
pandemic could tip markets back into the sort of chaos endured
earlier this year.
A selloff in March wiped a third off the value of U.S. stock
indexes .SPX over a three-week period and the premium for cash
dollars hit multi-year highs as the pandemic slammed markets and
locked down economies.
Now, with less than a week to go before the U.S.
presidential election, a resurgence of COVID-19 cases is forcing
Germany and France to consider stringent new restrictions that
will almost certainly damage Europe's faltering economic
recovery. Ulrich Leuchtmann, head of FX and commodity research at
Commerzbank said a double-whammy of the pandemic accelerating
and an unclear election result could push volatility
significantly higher.
"In the case of a very chaotic U.S. election outcome this
might even come to or close to the level we saw in spring."
Concerns were most strongly reflected in currency markets,
especially in the implied volatility contracts derivatives
traders use to protect investments against sudden swings in the
exchange rate.
One-week euro and yen implied volatility against the dollar
rose to their highest in nearly seven months EURSWO=FN
JPYSWO=FN , nearly doubling from a day ago as the maturities
now encompass election day on Nov. 3 and the day after.
The euro also came under pressure in cash markets, weakening
0.6% versus the greenback EUR=EBS , while U.S. and European
stocks fell by 3% or more .STOXX .SPX .
The election outcome has particularly strong resonance for
China, which has endured higher trade tariffs and a hostile
backdrop for its tech firms under U.S. President Donald Trump.
A win for Democrat challenger Joe Biden, who is currently
ahead in opinion polls, would mean more predictable trade
policies.
One-week offshore Chinese yuan volatility CNHSWO= traded
at 10.950, the highest since Jan. 7, 2016.
"We've got so much uncertainty ahead," said a trader at a
Chinese bank.
LIQUIDITY SQUEEZE?
While a Biden win is widely viewed as dollar-negative,
dollar swap markets, where traders outside the United States
source the currency, suggest some investors are starting to
hedge their bets.
Three-month euro-dollar swaps EURCBS3M=ICAP rose to 18.5
basis points, close to a one-month high, reflecting investors'
willingness to pay a greater premium for dollars.
With central banks now providing ample liquidity support,
reflected in money market funds and corporate balance sheets
flush with cash, this week's market jitters are not indicative
of an impending dollar shortage.
But with economies under fresh pressure and European COVID
deaths up 40% in the past week, investors are taking no chances
and the VIX equity volatility gauge .VIX is already close to
its June highs.
"Investors are finding a reason to sell," said Chris Bailey,
a strategist at Raymond James, noting the risk to growth and
economic recovery from tricky U.S. stimulus negotiations, a
surprise or disputed election outcome and renewed lockdown
calls.
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Fx market volatlity https://tmsnrt.rs/3kBFZOq
Currency swaps https://tmsnrt.rs/3kDcNXo
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