(Bloomberg) -- Speculative currency traders are betting on a stronger greenback for the first time in two months. The shift comes two weeks out from the US election.
Hedge funds, asset managers and other speculators in the week up to Oct. 22 held some $9.2 billion in bullish dollar positions, latest data released by the Commodity Futures Trading Commission and compiled by Bloomberg show. That’s the first net long since August and a flip in positioning of some $10.6 billion from week prior, when traders held a net short on the dollar.
Derivatives traders have pulled back sharply on their bearish dollar outlook throughout October, prompted both by a repricing of dovish Federal Reserve expectations amid a slate of stronger-than-expected economic reports and a move into haven assets ahead of a razor-close US election.
Ahead of a week with critical US data, “it’s risky to go into it short dollar given how strong the US outlook is right now,” said Win Thin, global head of markets strategy at Brown Brothers Harriman. “Lots of room for distorted data but overall, the economy remains robust.”
At Citigroup, strategists led by Dirk Willer said Friday that it’s time to take profits on some trades tied to a potential victory by Donald Trump in November, noting that hedge funds have “poured into” long dollar.
A Bloomberg gauge of the dollar is up some 3.2% so far in October, on pace for its best month in two years, while the cost to protect against a further advance in the greenback is similarly on the rise. The price of calls relative to puts on a broad dollar basket through the next 30 days has surged over the last month and is now near its highest mark since July.
“Options markets are pointing to a growing appetite for hedges against extreme moves” around the election, Karl Schamotta, chief market strategist at Corpay in Toronto, wrote in a note. “Currencies that have strong trade links with the US — the euro, yen, Chinese yuan, Canadian dollar, and Mexican peso — are all trading with significant risk discounts.”
Leveraged funds further added to their bets on a weaker Mexican peso, according to data from the CFTC. Hedge funds boosted their net short position on the Mexican peso by 2,241 contracts to 9,044, the data show.
Ahead of election day, the CFTC will release one more reading of trader positioning on Nov. 1, which will offer a snapshot of sentiment a week before the vote.
--With assistance from Vinícius Andrade.
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