The Wall Street giant maintains in a document that demand for the dollar increased last week as investors bet on a rebound before the US elections, and these purchases are likely to continue, strategists said, citing its internal metrics.
The most common operations combined the purchase of the US currency in the options market with the sale of the Singapore and Australian dollars, “indicating that investors are hedging against currencies linked to China,” reads the document cited by the Bloomberg agency. There was also strong demand for dollars against the Mexican peso and the euro, strategists including Patrick Locke wrote in a report.
This buying frenzy has pushed the dollar toward neutrality from a short position, having suffered its worst quarter in trade-weighted terms since late last year. This leaves considerable room for traders to increase their long positions ahead of the election, strategists noted.
“Electoral trading is already here,” the strategists wrote. “Despite dollar buying so far in October, the dollar’s net length continues to look fairly neutral. There’s room for more election-related coverage over the next two weeks“.
They estimated that bullish dollar option purchases are about two standard deviations above normal levels. According to data from the Commodity Futures Trading Commission (CFTC), speculators have almost completely unwound the net short dollar position they had accumulated in July.
“Old positions are being cleared ahead of the US election,” Kit Juckes, chief currency strategist at Societe Generale, wrote in a note to clients on Monday.
The bank also flagged an increase in euro selling, with some puts betting that the euro will depreciate to parity against the dollar. The risk of the euro falling to parity is increasing as the presidential candidate donald trump threatens to expand US tariffs beyond China into Europe if he wins the election.
“We see room for the short position in EUR/USD to continue to grow,” JP Morgan strategists wrote.
Demand for US bonds increases
U.S. bond funds received $13.6 billion in inflows last week, as banks increased their holdings of Treasuries, Barclays said.
Bond funds saw strong inflows of more than $13 billion in the five days ending last Thursday, surpassing the previous four-week average of $10.3 billion, according to a team at Barclays.
In a note on Monday, the Barclays team also mentioned that banks were again net buyers, mainly adding Treasuries to their equity portfolios.
Source: Ambito
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