A coin toss-like U.S. election is prompting some hedge funds to favor currency options, which would profit from a weaker dollar if Harris wins the presidential election.
Poll results in Iowa are very close, after Trump was considered to be a solid winner in the state, which surprised political observers, as Trump easily won the state in the last two presidential elections in 2016 and 2020. This has also led leveraged funds to reassess who will win, with some funds unwinding their bullish dollar bets on Monday.
Traders say some funds have further reversed positions—buying euro and Australian dollar call options because they believe the dollar will weaken if Democratic candidate Harris wins.
Mukund Daga, head of Asian foreign exchange options at Barclays Bank Plc in Singapore, said: "In an attempt to capture a reversal in the dollar trend through foreign exchange options, we are seeing some interest from hedge funds in a weaker dollar, primarily against the Australian dollar and euro." He mentioned that Australian dollar call options expiring one week to one month after the voting results are announced are favored by clients.
Traders from different market categories are preparing for potentially tumultuous election results, with many adjusting their investment plans at the last minute to respond to the intense campaigning.
As investors reconsider the likelihood of Trump or Harris winning in Tuesday's vote, Bloomberg's dollar index recorded its largest drop since August on Monday.
Citigroup strategist Daniel Tobon and others wrote in a report: "If Trump wins, the dollar could rebound by 3%, while if Harris wins, the dollar could decline by about 2%."
Positions in the more than $300 billion currency options market also reflect this trend: On Monday, the nominal trading volume of euro against dollar call options expiring in November from the DTCC exceeded 200 million euros (approximately $218 million), with a trading volume ratio of call options to put options exceeding 2.5:1. This above-normal betting will benefit from a strengthening euro against the dollar.
Data from DTCC shows a similar trend for the Australian dollar, with a nominal value of over 100 million Australian dollars in trades expiring in November, the ratio of call options to put options is about 2.5:1.
Volatility surge
Under the influence of political uncertainty in the U.S., the one-week implied volatility of euro against dollar (an indicator of expected movement during this period) surged to its highest level since March 2023. The Australian dollar also reached its highest level since December 2022.
"If Harris wins, the threat of additional tariffs will diminish," said Ashvin Murthy, chief investment officer at Singapore's AVM Capital Pte. "We will see currencies of all major U.S. export countries perform well, while the dollar will give back most of the gains from the past month."
The Bloomberg Dollar Spot Index fell more than 0.7% at one point on Monday, and remained relatively unchanged during the Asian session on Tuesday. The index surged 2.9% in October, marking its largest increase in two years, partly due to increased bets that Trump would win the presidency.
George Boubouras, head of research at hedge fund K2 Asset Management, said: "Part of the 'Trump trade' is to go long on the dollar, but the Iowa polls have indeed accelerated the rethinking and unwinding of bullish dollar bets. As voting proceeds, the options market will only become more volatile."
Article reposted from: Jin Ten Data