Hedge fund currency option bets are soaring on Trump tariff risk

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

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.”