Hedging the US Election: Currencies Brace for Volatility

As the US presidential election approaches, hedge funds are ramping up their bearish positions against currencies like the yuan and Mexican peso, speculating that a Trump victory could have significant implications for global markets. The surge in currency option trading reflects the growing uncertainty and the need for investors to hedge their currency risk ahead of the pivotal election.

Navigating the Currency Minefield: Investors Brace for Election Fallout

Betting on a Stronger Dollar

Hedge funds are increasingly turning to currency options to position themselves for a potential Trump win. The demand for dollar calls, which gain value if the greenback rises against other currencies, has been on the rise in the $300 billion-plus currency options market. This trend is driven by the shifting odds in Trump's favor, as evidenced by the surge in trading volumes on the yuan and peso, surpassing even the closely watched US jobs data."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."

Hedging Against Currency Volatility

The jump in option trading echoes the moves made by some of the world's largest companies to hedge their currency risk as the election date approaches. With former President Donald Trump edging ahead of Democratic nominee Kamala Harris in betting markets, investors are scrambling to anticipate the potential impact of a second Trump presidency on assets worldwide."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."The increased demand for options has driven up the one-month implied volatility, a measure of the expected future movement, for currency pairs like the offshore yuan and Mexican peso, reaching their highest levels in years.

Diversifying Hedging Strategies

As the costs of these options rise, investors are exploring alternative hedging strategies, such as looking at other currencies that may be affected by the election outcome, especially those correlated with the yuan."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."Standard Chartered's Tandon recommends Australian dollar put options as an alternative trade, which would rise in value if the Aussie weakens against the greenback.The currency markets are bracing for a period of heightened volatility as the US election approaches, and investors are employing a range of strategies to navigate the uncertainty. From ramping up bearish positions on currencies to diversifying their hedging approaches, the financial community is preparing for the potential fallout from the election outcome.