Implied Volatility Spikes Ahead of US Election | FXTRADING.com - International

  • Implied volatility for the next 24 hours and following week spiked notably higher overnight to show that traders are expecting some oversized moves due to the election.
  • Trump has claimed he expects to secure 306 electoral votes to secure the presidency today. 270 votes are required to declare a winner. Reports have also surfaced that a $1 million bet has been placed on Biden to win in the last coupe of hours. Still, rumours are circulating that it is a large investors attempt to sway public opinion in the remaining hours of polling.
  • Equities were broadly higher overnight in the lead-up to today’s election. Whilst many headlines attribute gains to a projected Biden win, we suspect short covering ahead of today’s volatility also played a big part.
  • Yesterday, the RBA cut interest rates to a new record low of 0.1%, launched QE (quantitative easing) program of $100bn over the next six months and also lowered their target rate for the 3-year government bond yield to “around” 0.1%. The Australian dollar and ASC 200 were sharply higher following the announcement.

 

Today’s Calendar Events (Time are GMT+10 Sydney)

Economic data will take a back seat in favour of the US presidential election today. Read Monday’s Weekly Roundup report for a broad overview of how thing may pan out in today’s election.

* Please note – volatility is expected to be much higher during the US election. Volatility does not necessarily result in large directional moves, and can instead provide large whipsaws and choppy trading conditions. As the election lasts several hours as states report their votes and forecasts are updated, the situation is fluid and can result in large moves in either direction before trends truly develop. Therefor extra caution should be used if trading through such a potentially high volatility event. And volatility could be sustained through the European and US sessions depending on what the outcome is. 

270 Electoral Votes Are Required to Win:
The popular vote is not enough. Trump or Biden need to secure 270 electoral votes out of the 538 available to secure the presidency. Whilst Hillary Clinton won the popular vote in 2016 (majority of voters in favour of her) she didn’t secure enough seats to win her way into the Whitehouse.

Key battle States That Could Provide Pockets of Volatility as Results Are Announced:
The following list shows states that are currently too close to call, so could go either way for Trump or Biden. Out of the 538 seats up for grabs, these states alone account for 173 of them (around 32% of the total). Or 64% of the 270 required to secure the presidency.

* Florida, Georgia and North Carolina count their votes relatively quickly and close their polls earlier in the night than most states. Whilst these three states won’t necessarily predict the winner, they will provide an early indication of who is in the lead and markets will likely react accordingly.

Keep an Eye on Race Calls / Projections:
Various media outlets will be crunching their own numbers to forecast who the winner will be throughout the day. Obviously, their ability to forecast with greater accuracy becomes more likely as the day progresses and more votes are officially counted. However, large moves can occur during the earlier results, especially if we see forecasts revised and switched between who is predicted to win.

 

Watchlist Update: 

The regular watchlist will resume tomorrow after the US election. For today, we’ll take a step back to allow for grater levels of volatility and may be a better position to lower the timeframe horizon tomorrow.

 

Gold (XAU/USD): Remains with Corrective Phase (For Now…)

  • The 50-day eMA has provided dynamic support on the daily chart, and the longer-term trend remains bullish despite being within a corrective phase.
  • Prices are now testing a descending trendline, although bulls may prefer to wait for a break above 1933.17 resistance before assuming the bullish trend has resumed.
  • A break below 1850 assumes a deeper correction from the 2075 high.
  • Many are forecasting a weaker USD, regardless of who wins the election. If this turns out to be the case, it builds a bullish scenario for gold over the coming week/s

 

DJIA (US30): 26k and 28k Are Pivotal Levels

  • Short covering ahead of polling stations closing has seen DJI rally to 27,400. This could be tempting for bears to fade into below 28,000 which has provided support and resistance in recent weeks.
  • A break above 28k brings the 29k highs and all-time high into focus. If volatility is anything like seen in 2016, then a bullish rally could easily blow beyond the all-time highs (ATH).
  • Whilst bears could target the lows around 27k over the near-term, a break beneath this support zone assumes something has indeed gone wrong and brings the long-term Fibonacci levels into focus.

AUDUSD: 70c Provided Solid Support

  • Not only did 70c provide solid support but bullish momentum has taken it to recent cycle highs and broken a descending trendline.
  • Therefor as long as equities remain bullish it paints an upside bias for AUD/USD (and risk pairs in general).
  • However, if sentiment sours and equities go into free-fall then it could easily drag AUD/USD through 70c and bring the lows around 0.6770 into focus.

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