Investors are bracing themselves for sharp swings in China’s renminbi in the immediate wake of the US election, with a measure of hedging activity soaring to its highest level on record.
Implied overnight volatility for the renminbi’s offshore exchange rate against the dollar jumped to a record level of more than 24 per cent on Tuesday, reflecting moves by traders to protect against or speculate on a win by either candidate throwing China’s currency for a loop.
“It’s a pure reflection of uncertainty for the election, and for the following week if the results remain unclear,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.
Expectations for higher volatility as a result of the polls have risen across major currency pairs. Overnight implied volatility, which tracks trading in the options market, rose more than four times higher for the euro while the same measure moved even more for the Japanese yen, due to its perceived role as a haven currency.
China’s renminbi has strengthened in recent weeks on rising expectations of a victory for Democratic challenger Joe Biden over Republican incumbent Donald Trump, with hopes rising for an easing in trade tensions between Washington and Beijing.
“We believe the [renminbi’s] strong performance over the past month likely reflects, at least in part, markets increasingly pricing in a Biden victory,” wrote Goldman Sachs analysts in a note.
But investors are taking measures to protect themselves from the looming uncertainty and potentially sharp price moves due to the US election. Implied one-week volatility also jumped to a record high, albeit to a relatively lower level of about 14 per cent. The rising jitters were not reflected in the “spot” market, where the offshore exchange rate for the currency remained virtually unchanged at Rmb6.67 against the dollar.
Mr Mohi-uddin said the spike in implied overnight volatility showed markets were focused on possible swings over the next 24 hours as polling got under way in the US, while elevation of the one-week rate pointed to concerns that a clear winner might take days to determine.
“The outcome of the election will clearly increase volatility in the near term, but we think the renminbi continues to look favourable in the longer term thanks to the Chinese economy’s outperformance,” he added.
With no major results out during the Chinese trading day on Tuesday, the more stringently regulated onshore renminbi exchange rate remained little moved on Tuesday at Rmb6.68. That left it nearly 4 per cent stronger against the dollar for the year to date.
Demand for China’s currency this year has been driven in large part by inflows to onshore securities as international investors seek to capitalise on the country’s economic recovery, which has kept bond yields higher than those in the west and propelled onshore stocks to highs unmatched by other major markets.