Dollar Options Surge as Funds Reenter Trades Amid Tariff Uncertainty
Following President Trump's announcement of impending tariffs on Mexico and Canada, leveraged funds have flocked back into bullish dollar options. This reversal occurs just a day after they exited similar positions.
Prior to Trump's tariff proclamation, hedge funds unwound long dollar calls against currencies like the yuan, euro, and Canadian dollar. However, the announcement has reignited interest in dollar call options, particularly against the Canadian dollar.
Mukund Daga, head of foreign-exchange options for Asia at Barclays Bank Plc, attributes the surge in dollar options to market uncertainty surrounding Trump's trade policies.
The popularity of dollar call options stems from expectations of higher tariffs, which may exacerbate inflationary concerns and support US yields and the greenback.
According to The Depository Trust & Clearing Corporation (DTCC), dollar-Canadian dollar options were the second most actively traded currency pair on Tuesday. RBC Capital Markets' Jian Cao confirms that long dollar positions against the Canadian dollar have been prevalent among hedge funds.
Despite Monday's significant dollar selloff due to Trump's initial reluctance to impose tariffs, analysts anticipate that market volatility will continue. Nathan Swami, head of FX trading for Asia Pacific at Citigroup Inc., suggests that long-term players may seize opportunities to reenter trades at more favorable levels.