(Bloomberg) -- Demand for the dollar surged last week as investors bet on a rally in the run-up to the US election, and this buying is likely to continue, said strategists at JPMorgan Chase & Co, citing their proprietary metrics.
The most popular trades paired buying of the US currency in the options market with selling of the Singapore and Australian dollars, a sign that investors are hedging exposure to China-linked currencies. There was also strong demand to buy the dollar against the Mexican peso and the euro, strategists including Patrick Locke wrote in a report.
The flurry of buying has taken the dollar’s positioning toward neutral from short, after the US currency’s worst quarter on a trade-weighted basis since the end of last year. That leaves ample room for traders to add to their long positions ahead of the election, the strategists wrote.
“The election trade is here,” the strategists wrote. “Despite the dollar buying so far in October, overall dollar net length looks fairly neutral still. There is scope for more election hedging over the next two weeks.”
They estimated buying of bullish calls on the dollar at near two standard deviations away from normal levels.
According to Commodity Futures Trading Commission data, speculators have almost completely unwound the net dollar short they accumulated in July.
“The decks are being cleared of old positions ahead of US elections,” Societe Generale’s chief FX strategist, Kit Juckes, wrote in a note to clients Monday.
JPMorgan also noted a pick-up in euro selling with some put options targeting the euro depreciating to parity against the dollar. The risk of the euro sliding to parity is mounting as presidential candidate Donald Trump threatens to expand US tariffs beyond China to Europe if he wins the vote.
“We see scope for EUR/USD short to continue building out,” JPMorgan strategists wrote.
--With assistance from Vassilis Karamanis.
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