Corporate DispatchPro SWAHA PATTANAIK VIA REUTERS BREAKINGVIEWS
Angst-ridden end to 2020 is written into options Nails bitten to the quick will soon be bitten to the knuckle. The next three months bring a U.S. presidential election, the endgame of tetchy trade talks between Britain and the European Union and more. With central bankers like Federal Reserve Chairman Jay Powell keeping bond markets on a tight leash, investors will express their angst through foreign exchange markets instead. It’s already starting to show. Two big dates could generate large market swings: the U.S. vote on Nov. 3, and the end-year deadline to replace transitional EUUK trade arrangements. Each brings its own extreme scenarios – say, President Donald Trump contesting the American election outcome, or Britain choosing an economically damaging no-deal option. Another potential source of volatility is Powell’s new policy framework for the Fed, which targets average inflation rather than the level at any given moment. Investors are still figuring out what it means for policy and inflation. Meanwhile rebounding Covid-19 infections are casting new shadows that may require yet more fiscal and monetary easing. Investors can usually express their nerves by buying and selling bonds. But they can’t do that as freely at the moment, because of the huge amount of fixed-income securities that Powell and his peers are buying to stimulate the economy. Equity markets offer another outlet, but company shares come in relatively small quantities. The more popular avenue will therefore be the vast and liquid foreign exchanges where global daily turnover is $6.6 trillion. That is reflected in the FX options market.
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