Demand for the U.S. dollar surged last week as investors placed bets on a rally ahead of the upcoming U.S. presidential election, according to strategists at JPMorgan Chase & Co., who cited their proprietary metrics. The surge in buying is expected to continue in the coming weeks.
The most popular trades involved purchasing the U.S. dollar in the options market while selling the Singapore and Australian dollars, signaling that investors are hedging exposure to currencies linked to China. There was also strong demand to buy the dollar against the Mexican peso and the euro, JPMorgan strategists—including Patrick Locke—said in a recent report.
This flurry of dollar buying has shifted market positioning toward neutrality, following the U.S. currency’s worst quarter on a trade-weighted basis since late last year. With the dollar now in a more balanced position, traders have plenty of room to add to their long positions as the election approaches.
“The election trade is here,” the strategists wrote. “Despite the dollar buying so far in October, overall dollar net length remains fairly neutral. There is still room for more election-related hedging over the next two weeks.”
JPMorgan noted that the volume of bullish options bets on the dollar is near two standard deviations higher than normal levels.
According to data from the Commodity Futures Trading Commission (CFTC), speculators have almost completely unwound the net dollar short position they accumulated in July.
“The decks are being cleared of old positions ahead of the U.S. elections,” said Kit Juckes, chief FX strategist at Societe Generale, in a note to clients on Monday.
JPMorgan also observed an increase in euro selling, with some traders purchasing put options targeting the euro to depreciate to parity with the dollar. The risk of the euro sliding to parity has increased as U.S. presidential candidate Donald Trump threatens to extend U.S. tariffs beyond China to include Europe if he wins the election.
“We see potential for EUR/USD shorts to continue building,” JPMorgan strategists wrote.
