As the world watches with bated breath, European traders are strategically positioning themselves to weather the impending storm of the pivotal US election. With high stakes and far-reaching implications, these savvy market participants are employing a range of tactics to safeguard their portfolios and capitalize on the potential volatility.

Hedging Risks and Seizing Opportunities in the Face of Uncertainty

Bracing for Euro Turbulence

The cost of hedging the euro has surged to its highest level in over four years, reflecting the currency's vulnerability to a potential broad-based US dollar rally. Traders are closely monitoring the relative outperformance of the euro in the spot market, anticipating further gains for the greenback after its near 3% surge last month. Wagers on a strong US currency have been a popular way to position for a Trump victory, with options targeting the euro, pound, and Norwegian krone in high demand. As of October 29th, traders held the largest short position in the euro in four years, signaling their bearish sentiment. Some are even betting on the euro falling to parity, a position that could gain traction if Trump's tariff plans materialize.

Seeking Refuge in the Swiss Franc and German Bonds

In the face of the looming uncertainty, European traders are turning to the Swiss franc and German bonds as safe havens. Options bets are bullish on the Swiss franc, albeit at significantly lower levels compared to August, as the currency's haven status continues to attract investors. Meanwhile, European bonds are becoming more attractive relative to Treasuries, with the extra yield investors demand to hold 10-year Treasuries over German bunds reaching a high not seen since May. This trend reflects the prospect of greater fiscal spending in the US, regardless of the election outcome.

Scandinavia's Currencies: Potential Beneficiaries of a Harris Win or Split Congress

Traders have been aggressively selling both the Norwegian and Swedish currencies in October, and options bets have remained bearish since then. However, these Scandinavian currencies could potentially benefit the most from a Harris win or a split Congress, as the political landscape shifts.

Pound's Vulnerability and the Potential for Further Declines

Risk-reversal options, a gauge of how much it costs to buy rather than sell a currency, show traders are staying bullish on the dollar against the pound. Wagers on a fall in sterling over the next month are at the highest level since May 2023, which could further dent the British currency's rally that has made it one of the world's top performers this year. Significant trades in recent weeks include bets on the pound slipping to $1.28 by mid-November and further wagers on the currency hitting that level by January 21st, a day after the inauguration.

Interest Rate Bets: Diverging Paths for the ECB and the Fed

The European Central Bank is expected to cut rates at a faster pace than the Federal Reserve, driven by better US growth prospects and the potential for larger government spending. Recent economic data has been stronger in the US, while Germany, the eurozone's largest economy, only managed to avoid a recession in the last quarter. One trader is aiming for a sixfold return on an options futures bet that the ECB will quicken its pace to prop up the economy. However, the policy paths of the two central banks may diverge depending on the election outcome, with a Harris win potentially leading to a more gradual approach, while Trump's tariff plans could spur markets to bet on fewer Fed cuts.As the world waits with bated breath for the US election results, European traders are navigating a complex web of risks and opportunities. From hedging against euro volatility to seeking refuge in safe-haven assets and positioning for potential shifts in central bank policies, these market participants are leaving no stone unturned in their quest to safeguard their portfolios and capitalize on the unfolding events.