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U.S. Election Anxiety Joins Virus Fears in Fueling Yen Swings

U.S. Election Anxiety Builds on Virus Fears to Spur Yen Swings

(Bloomberg) -- The cost of hedging the yen has increased and surprisingly it isn’t just escalating fears of the deadly coronavirus that are gripping global markets -- it’s also reflecting market anxiety on the implications of the U.S. presidential contest.

One-month implied price swings in dollar-yen headed for its strongest close in more than two months. The move coincided with stocks posting deep losses and Treasuries rallying amid dwindling risk sentiment. The gauge, which also covers crucial caucuses in February, suggests investors are buying protection in the event Bernie Sanders posts a victory in the Democratic candidate race.

U.S. Election Anxiety Joins Virus Fears in Fueling Yen Swings

Sanders, a self-described democratic socialist, has proposed measures including taxes on Wall Street transactions and higher taxes to cover health care. While latest polls show former Vice President Joe Biden holds a sizable lead nationally, many indicate Democrats in the early-voting states might favor Sanders. In Iowa, Sanders was leading, according to the New York Times/Siena College survey, with 25% support. Market participants have already begun to address this outcome, according to two Europe-based traders.

Hedge funds are adding long-yen volatility trades on the three-week and one-month tenor, the traders say. That covers the Iowa caucus on Feb. 3 and the one in New Hampshire on Feb. 11. Alongside outright demand for volatility, leverage accounts are also adding options that pay out on a large move lower in dollar-yen.

U.S. Election Anxiety Joins Virus Fears in Fueling Yen Swings

(Michael Bloomberg is also seeking the Democratic presidential nomination. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

--With assistance from Neil Chatterjee.

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Anooja Debnath, William Shaw

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