Traders Are Paring Bearish Dollar Bets Leading Into US Election

(Bloomberg) -- Speculative currency traders who vacillated all year between bullish and bearish views on the dollar just made their biggest move in three years ahead of the US election.

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Hedge funds and asset managers in the second week of October reduced dollar shorts, or bets against the greenback, by some $8 billion. That net positive swing in trades was the largest since the depths of the pandemic in 2021, latest data released by the Commodity Futures Trading Commission and compiled by Bloomberg show. After entering the month holding more than $13 billion in bearish wagers on the greenback, these derivatives traders are now effectively flat.

“With weeks to go, the market can no longer ignore the US election risks,” Mark McCormick, global head of FX And EM strategy at TD Securities, wrote Monday in a note.

“It’s a binary outcome with sizeable tail risks to markets,” he added. “Stick with the US dollar.”

A Bloomberg gauge of the dollar is up some 2.8% so far in October, on pace for its best month in two years.

The cost to hedge a rise in the greenback reflects the renewed interest in bullish positioning. The price of calls relative to puts on a broad dollar basket through the next 30 days has surged over the last month and is now at its highest mark since July.

According to Citigroup, fixed-income traders are hedging election risks by reducing exposures across portfolios and asset classes, from interest rates to foreign exchange. If 2020 is any guide, currencies like the euro and Mexican and Chilean pesos further sold off in the days before the election, according to strategists including Dirk Willer and Yasmin Younes in a recent note.

Short-term traders have been buying the dollar and reducing duration positions — although bets tied to Donald Trump winning the White House instead of Vice President Kamala Harris could see some profit-taking immediately ahead of Election Day, they added.

“With the election too close to call, we are entering a zone of uncertainty,” the strategists said. “We think this makes positioning and de-risking of portfolios a potential driver in the short-term, at least with respect to trades that are vulnerable to one of the more likely possible outcomes.”

--With assistance from Tatiana Darie.

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