As a tight US election race heads to its conclusion, some hedge funds are pivoting toward currency options that could profit from a weaker dollar in the event of a Kamala Harris presidency, according to a report by Bloomberg citing data from the Depository Trust & Clearing Corp (DTCC).
Polling in Iowa, previously leaning towards Republican nominee Donald Trump, showed a closer race than expected, prompting leveraged funds to reassess the outcome and unwind some bullish dollar bets on Monday.
Several funds took it further, buying euro and Australian dollar call options in anticipation of a weaker dollar if Harris, the Democratic candidate, wins, according to traders.
“We’ve seen hedge fund interest in dollar-weakness plays, especially against the Aussie and euro, via FX options,” said Mukund Daga, Barclays Bank’s Singapore-based head of FX options for Asia. Aussie-dollar call spread options with expiries from one week to one month gained popularity after the poll results, he noted.
Across markets, traders are preparing for a potentially volatile election outcome, with many making last-minute adjustments to their strategies. Bloomberg’s dollar index recorded its largest decline since August on Monday, reflecting investor uncertainty over the race’s outcome.
“A Trump victory could boost the dollar by 3%, while a Harris win could trigger a roughly 2% fall,” wrote Citigroup strategists, including Daniel Tobon, in a note.
Currency options positions in the $300bn-plus market reflect this trend, with notional November-expiry euro-dollar call option trades exceeding €200m ($218m) on Monday at the DTCC, as calls outnumbered puts by more than 2.5 to 1, indicating a bet on a stronger euro versus the dollar.
Similar trends appeared in the Australian dollar, where November-expiry call options of AUD100m or more were traded at a 2.5 to 1 ratio over puts, according to DTCC data.
Implied volatility for euro-dollar one-week options, which measures expected price swings, spiked to its highest level since March 2023 amid the uncertainty surrounding the election. For the Australian dollar, volatility rose to its highest since December 2022.
