(Bloomberg) -- A coin-toss US election is spurring some hedge funds to favor currency options that will gain from a weaker dollar should Kamala Harris win the presidency.
Close polling in Iowa, which had previously been seen as safely going to her opponent and Republican nominee Donald Trump, jolted leveraged funds to re-evaluate who will emerge victorious, with some unwinding bullish greenback bets on Monday.
Others went further — buying euro and Australian dollar call options on views the US currency would weaken if Harris, the Democratic candidate, wins, traders said.
“To try and capture a reversal in the dollar trend – via FX options — we’ve seen some interest for a dollar-weakness play, mainly against Aussie and euro, from the hedge fund community,” said Mukund Daga, Singapore-based head of FX options for Asia at Barclays Bank Plc. Aussie-dollar call spread options in expiries ranging from one week to one month were client favorites after the poll results, he said.
Traders across market classes are gearing up for a potentially volatile election outcome, with many making last-minute tweaks to their investment game plans for the close race. Bloomberg’s gauge of the dollar fell the most since August on Monday as investors reconsidered the chances of Trump or Harris prevailing in Tuesday’s vote.
“A Trump victory could see the dollar rally 3%, whereas a Harris victory could see the USD fall around 2%,” Citigroup Inc. strategists including Daniel Tobon wrote in a note.
Positions in the $300 billion-plus currency option markets back the trend: notional November-expiry euro-dollar call option trades of over 200 million euros ($218 million) on the Depository Trust & Clearing Corp. outnumbered their put-option equivalents on Monday by a ratio of more than 2.5 to 1. That heftier-than-normal wager would benefit from a strengthening euro against the greenback.
Similar trends are emerging for the Aussie, with notional trades of A$100 million or more expiring in November displaying around a 2.5 to 1 ratio of calls to puts, DTCC data showed.
Volatility Surges
Euro-dollar’s one-week implied volatility, a measure of the pair’s expected movement over that time period, surged to its highest level since March 2023 amid the US political uncertainty. For the Aussie dollar, it was the most since December 2022.
“If Harris wins, the threat of extra tariffs diminishes,” said Ashvin Murthy, chief investment officer at AVM Capital Pte. in Singapore. “We will see an outperformance in the currencies of all the big exporters to the US, while the greenback will give back most of its returns over the past month.”
The Bloomberg Dollar Spot Index was little changed in Asia Tuesday after dropping more than 0.7% at one point on Monday. The gauge jumped 2.9% in October, the most in two years, partially due to wagers that Trump would win the presidency.
“Part of the Trump Trade is long dollar, but the Iowa polls really accelerated a re-think and covering of bullish dollar bets,” said George Boubouras, head of research at hedge fund K2 Asset Management. “The options market will only get more volatile from here as the vote gets underway.”
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