Currency options trading skyrockets as politics upend bets
The longer-term backdrop of a surging US dollar is adding fuel to fire as political risks spill over into the US$7.5 trillion a day foreign exchange market
MONDAY (Jan 6) started quietly in the US$300 billion-plus currency options market until political headlines triggered the most hectic trading day in nearly two months – a taste of what may lie in store in 2025.
Volumes surged to US$108 billion by the close of trade, surpassing even the activity seen on the Federal Reserve and Bank of Japan monetary policy announcement days last month, indicated data from Depository Trust and Clearing Corp. Two of the drivers for the spike in trading were: headlines on Canadian Prime Minister Justin Trudeau’s resignation and potential US tariffs.
Active trades on Monday included capitulations in euro-US dollar parity positions, according to Nomura International. Some investors cut back US dollar-Candian dollar vanilla calls and digital options (digis) that would have profited from a stronger US currency, Barclays said. The yuan was also in focus, with some traders taking advantage of a weaker greenback to buy US dollar-yuan calls, said Standard Chartered.
The longer-term backdrop of a surging US dollar is adding fuel to fire as political risks spill over into the US$7.5 trillion a day foreign exchange market. Hedge funds have catapulted bullish US dollar positions to the highest level since January 2019 as the US economy outperforms and President-elect Donald Trump’s tariff threats fuel haven demand for the currency. At the same time, that lopsided positioning means there is a greater risk of losses should a sudden reversal grip markets.
Short-term funds were seen on Monday to be unwinding long US dollar option positions versus currencies of tariff-threatened countries. That followed a Washington Post report that Trump’s aides were exploring tariff plans that would be applied to every country but only cover critical imports. Trump subsequently denied the report.
“Tariff headline driven price action in foreign exchange today is giving us a potential glimpse of the next four years of US presidential rule,” said Sagar Sambrani, a senior foreign exchange options trader at Nomura in London. “The street has seen unwinds of euro and pound downside trades in mid-tenors – one to three months – as well as profit taking on dollar-Swiss franc topside.”
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Currency option markets were also energised by reports that Trudeau was expected to announce he would resign as Liberal Party leader. Traders responded by seeking to lock in profits on US dollar-Canadian dollar trades. Trudeau announced early on Tuesday that he will step down.
The news “was deemed positive for the Canadian dollar as the market foresees this as giving more room for a new leader in Canada to collaborate with Trump and defuse any escalation in the tariff saga”, said Mukund Daga, head of foreign exchange options for Asia at Barclays Bank in Singapore. “We saw unwinds of topside USD/CAD (US dollar/Canadian dollar) vanilla calls and digis as people took profit on their CAD bearish view.”
The US currency’s weakness threw up other possible trades too. Some investors decided to buy US dollar call options – which gain in value if the currency advances – versus the yuan.
“For US dollar-offshore yuan, people are adding on dips,” said Saurabh Tandon, global head of foreign exchange options at Standard Chartered Bank in Singapore. “The belief is the move higher will be there for a while, and the forward points allow good entry points as a carry trade as well.”
Popular expressions seen on Monday were digital options and call spreads, while some traders were using early knock-out options as an overlay, he said, referring to a contract that is deactivated if a specific barrier is hit during a certain time frame. BLOOMBERG
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