As the US presidential election approaches, speculative traders have significantly increased their bullish sentiment towards the US dollar. In the second week of October, funds reduced their short positions on the US dollar by about $8 billion, resulting in a balance between long and short bets on the dollar. Mark McCormick of Morgan Stanley pointed out that market concerns about election risks have intensified, leading to a 2.8% increase in the US dollar in October. Citigroup's strategists stated that fixed income traders are hedging election risks by reducing exposure, while short-term traders are buying the dollar to cope with uncertainty
Since the beginning of this year, speculative traders have been wavering between bullish and bearish bets on the US dollar, but on the eve of the US presidential election, they made the largest adjustment in three years.
In the second week of October, hedge funds and asset management companies significantly reduced their short positions on the US dollar, betting against the dollar, by about $8 billion. The latest data released by the Commodity Futures Trading Commission (CFTC) shows that the net positive fluctuation of this trade is the largest since the peak of the 2021 pandemic.
Earlier this month, these derivative traders also held over $13 billion in bearish bets on the US dollar, but now the bullish and bearish bets on the dollar are essentially balanced.
Mark McCormick, Global Head of Foreign Exchange and Emerging Markets Strategy at TD Securities, wrote in a report on Monday, "With only a few weeks left until the election, the market can no longer ignore the risks associated with the US election." He added, "This is a binary outcome, with significant tail risks for the market, and I advocate holding the US dollar."
The Bloomberg Dollar Index has risen by about 2.8% so far in October, on track for its best monthly performance in two years.
The cost of hedging against a rise in the US dollar reflects traders' renewed interest in bullish positions on the dollar. Over the past month, the price of options on a basket of currencies that bet on a rise in the US dollar in the next 30 days has significantly increased relative to options betting on a fall, now reaching the highest point since July.
Citigroup stated that fixed income traders are hedging election risks by reducing exposures across portfolios and asset classes (from interest rates to foreign exchange). The bank's strategists Dirk Willer and Yasmin Younes recently stated in a report that if 2020 is taken as a reference, currencies such as the euro, Mexican peso, and Chilean peso are expected to decline further in the days leading up to the election.
They added that short-term traders have been buying the US dollar and reducing duration, although some profit-taking may occur on bets related to whether former US President Trump or Vice President Harris will win the White House before election day.
These strategists stated, "As the election outcome is uncertain, we are entering a period of uncertainty. We believe that for trades susceptible to election impact, portfolio adjustments and de-risking could be potential short-term drivers of the market."
However, BlackRock CEO Larry Fink stated that the upcoming US election results are "really not that important" for the financial markets. Fink said at a conference hosted by the Securities Industry and Financial Markets Association on Monday, "I'm tired of hearing that this is the most important election of your lifetime. The reality is, it's not that important over time."
Fink added, "Unfortunately, people pay too much attention to the ups and downs of the market at any given time or quarter, which is not really important." However, he noted, "We have worked with both administrations and are in conversations with both presidential candidates."