FX options flag uncertainty before U.S. midterm election; bonds complacent


By Gertrude Chavez-Dreyfuss and Richard Leong

NEW YORK (Reuters) – Currency options investors are bracing for increased volatility and possible U.S. dollar weakness going into the U.S. midterm elections next month.

But in the bond market, investors don’t see the midterm election as a major catalyst for moves in interest rates.

Hedging activity increased in October in the yen, Australian and New Zealand dollars versus the greenback for maturities as far out as one year, strategists said.

Control of the U.S. Congress is at stake in the Nov. 6 election. Polls suggest the most likely outcome will be Democrats winning control of the House of Representatives with Republicans retaining the Senate.

A divided Congress could mean government gridlock, and this prospect has spawned some complacency in the bond market. Investors believe this outcome would not change the underlying upward trajectory of U.S. economic growth nor the pace of interest rate increases by the Federal Reserve, analysts said.

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