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Analysts at MUFG Bank, argue financial markets could be troubled by a poor performance by US candidate Biden at next week’s first presidential debate. They see the yen as the potential biggest gainer in a risk-off environment.

Key Quotes:

“The US dollar has advanced versus all G10 currencies this week as concerns grow over the outlook for economic activity. The advance this week will be the third week out of four and the 1.45% gain as we write will be the largest weekly advance for DXY since the first week of April when volatility was still very high following the onset of the COVID crisis. The S&P 500 is now down close to 10% from the record high on 2nd September driven in part from still elevated COVID infection rates, signs of a slowing in US economic activity, and still there being no agreed deal for additional fiscal stimulus. The approaching US election could well also be now playing a role in reduced appetite for risk and election risks are set to escalate further from here. With the election 5 weeks away from next Tuesday, the difference in USD/JPY 1mth and 2mth implied volatility is at a record in data going back to 1996 – see below.”

“The expectations of a considerable jump in FX volatility are understandable. Indeed, it is more understandable in USD/JPY specifically – elevated uncertainty post the election under a scenario of no definitive winner will likely see JPY outperform notably.”

“The first TV debate next week is important. Biden has averaged between a 6-8pt lead over Trump nationally and is currently about 2.0pts better off than Clinton in 2016 in key battleground states. A poor performance by Biden next week could undermine the dollar versus core G10 currencies, especially versus JPY.”