Finance and Economics APP learned that on November 5, 2024, local time, the voting for the 2024 US election began. European traders are currently attempting to short the euro and british pound before the impact of the US election results, hedging risks with the swiss franc and German bonds.

For Europe, Republican presidential candidate Trump's plan to raise tariffs will harm industries in Europe that have high exposure to the US, leading to a significant drop in the euro to dollar exchange rate. In addition, plans by Trump and Democratic presidential candidate Harris to boost US government spending will complicate market bets on interest rates.

Euro hedging costs have soared to the highest level in over four years. Given the euro's relatively strong performance in the spot market last month, the euro may be more vulnerable to a comprehensive rise in the dollar. Even though the dollar surged nearly 3% last month, traders are still anticipating further dollar strength.

Data from the Depository Trust & Clearing Corporation (DTCC) in October showed that betting on a stronger dollar has been one of the most popular ways to bet on a Trump victory. If the dollar strengthens against the euro, british pound, and Norwegian krone, options betting on a stronger dollar will bring returns. Shorting the euro is one of the most popular bets, with traders holding the highest levels of short euro positions in four years as of October 29.

Some traders are even betting that the euro will fall to parity against the dollar—if Trump wins and imposes tariffs on European goods, this view may gain further support. In October, around 4.6 billion euros were bet that the euro to dollar exchange rate will fall to parity or below by July next year, a bet size much higher than the 0.366 billion euros in September.

Meanwhile, risk reversal options show that traders are still bullish on the dollar against the british pound, betting that the pound will decline next month to the highest level since May 2023. While the pound has been one of the best performing currencies globally, this may weaken its uptrend this year. In recent weeks, the largest trades include 0.19 billion pounds betting that the pound to dollar exchange rate will fall from the current near 1.30 to 1.28 by mid-November, and 0.146 billion pounds betting that the rate will reach 1.28 on January 21 next year. Furthermore, around 54% of plain vanilla options exposure is preparing for a decline in the pound.

However, options trading is bullish on the swiss franc, as the currency plays a role as a safe haven.

In terms of ​bonds, compared to US Treasuries, European bonds are more attractive because regardless of who wins the election, US fiscal spending is likely to continue to increase. This has led to the yield spread between holding US ten-year Treasuries and holding German ten-year bonds rising to 200 basis points last week, the highest level since May. Despite the increase in US Treasuries on Monday, the post-election situation may push this yield spread to over 220 basis points.

However, if Trump wins and cancels funding for Ukraine, the pressure faced by the Eurozone to support Ukraine financially may require the region to issue more bonds, thereby increasing bond yields and narrowing the gap with its US counterparts.

Over the past month, the open interest contracts of German ten-year bond futures have remained stable, indicating that the market has little interest in increasing insurance measures against the outcome of the US election. This suggests that if these contracts are closed, the sharp price fluctuations after the US election results may be reduced.

In addition, traders expect the European Central Bank to cut interest rates faster than the Federal Reserve, as the US economic outlook is positive and government spending may expand, while the Eurozone economy is weak. The money market expects both the European Central Bank and the Federal Reserve to cut rates by around 125 basis points next year. In the event of a Harris victory, policymakers are more likely to maintain the current path, while Trump's victory could result in tariff policies or market stimulus shifting towards betting on the Federal Reserve slowing down rate cuts.