Hedge fund ramp up FX bets on Trump speculation

Hedge funds are ramping up bearish positions against currencies from the yuan to the Mexican peso to speculate that Donald Trump will win the US presidential election next month. 

Dollar calls are rising in popularity in the $300 billion-plus currency options markets — positions that gain in value if the greenback rises against tariff-threatened peers, traders say. Contract volumes on the yuan and peso were the highest this month on Tuesday, surpassing those on the hotly-watched US jobs data on Oct. 4, Depository Trust & Clearing Corporation data showed. 

“It started when odds started shifting in Trump’s favor last week,” said Saurabh Tandon, Singapore-based global head of FX options at Standard Chartered Bank. “The most popular expressions have been topside dollar-offshore yuan followed by downside euro-dollar and topside dollar-Mexican peso.”

The jump in option trading echoes moves by some of the world’s biggest companies to hedge their currency risk as the election date of Nov. 5 draws near. Former President Donald Trump is edging ahead of Democratic nominee Kamala Harris in betting markets, putting pressure on investors to game-plan what a second Trump presidency would mean for assets everywhere. 

Hedge funds showed no clear positioning on the vote just over a week ago. Trump said that tariffs would help “tremendously” in preventing China and other countries from flooding the US with products in a Bloomberg News interview Tuesday. He has previously threatened across-the-board tariffs, including a 60% levy on imports from China and duties of at least 10% on the rest of the world.

Those views jolted markets into mapping out what that could mean for currencies from the yuan to the peso and euro. 

“Currency options’ interest is picking up in the past week and it’s yet to peak,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne. “This is the biggest election of all — you need to hedge for it.” 

Demand for options has helped send the currency pairs’ one-month implied volatility — a measure of their expected future movement, and which covers the US election result — surging. The offshore yuan’s rose to the highest level since December 2022 this week, while the Mexican peso’s climbed to nearly a four-year high. 

Most of the option positions were in forms of outright vanillas and digitals out to year-end, said Standard Chartered’s Tandon. Vanilla refers to a simple call option that has no special features or observation dates, while digital options offer the opportunity of a fixed payout if the underlying market price exceeds the strike price, a pre-determined limit.

On DTCC Wednesday, call options continued to dominate dollar-yuan trading with strikes ranging from 7.12 to 7.30 for contracts expiring in 2024. For these contracts to be profitable the currency pair will need to rise above the strike level before the contracts expire.   

The increase in costs of these options may spur investors to look at even more currencies in coming days that might be affected, especially those correlated with the yuan. As an alternative trade, Tandon recommends Australian dollar put options, which rise in value if the Aussie weakens versus the greenback. 

“Options trades will likely keep surging,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. “Betting on a stronger dollar is an easy sell, considering it’s also a haven.”