Hedge funds are betting on a rising dollar in the shadow of the US election

Hedge funds are increasing their bets against international currencies like the yuan and the Mexican peso to profit from a possible victory by Donald Trump in the upcoming US presidential election. In the currency options market, which has grown to over $300 billion, dollar calls are gaining popularity. These options yield profits if the dollar appreciates in value compared to currencies threatened by tariffs, according to traders. Data from the Depository Trust & Clearing Corporation showed that contract volumes for the yuan and peso on Tuesday even surpassed the closely-watched US employment data from October 4. According to Saurabh Tandon from Standard Chartered Bank, this trend started when probabilities shifted in Trump's favor last week. The most popular positions currently are against the offshore yuan, the euro-dollar, and the dollar-Mexican peso. The rising demand for options has caused the one-month implied volatility of currency pairs, which takes the expected US election outcome into account, to surge. The offshore yuan reached its highest level this week since December 2022, while the Mexican peso climbed close to a four-year high. George Boubouras from K2 Asset Management sees this as a sign of the increasing need to hedge against the most significant elections. He expects interest in currency options to continue to grow. Shoki Omori from Mizuho Securities Co. describes the bet on a stronger dollar as particularly attractive, given its traditional status as a safe haven. Traders could steadily opt for plain vanilla and digital options, Tandon explains, as these provide an easy entry until the end of the year. A weaker Australian currency could present an alternative strategy by investing in Australian dollar options that gain in value if the Aussie falls against the greenback.