(Bloomberg) — Monday started quietly in the $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 for 2025.
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Volumes surged to $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, according to data from Depository Trust and Clearing Corp. Two of the drivers for the spike-up in trading: headlines on Canadian Prime Minister Justin Trudeau’s resignation and potential US tariffs.
Active trades on Monday included capitulations in euro-dollar parity positions, according to Nomura International. Some investors cut back dollar-loonie vanilla calls and digital options that would have profited from a stronger US currency, Barclays Plc said. The yuan was also in focus, with some traders taking advantage of a weaker greenback to buy dollar-yuan calls, according to Standard Chartered.
The longer-term backdrop of a surging greenback is adding fuel to fire as political risks spillover into the $7.5-trillion-a-day foreign-exchange market. Hedge funds have catapulted bullish 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 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.”.
Currency option markets were also energized by reports that Trudeau was expected to announce he would resign as Liberal Party leader. Traders responded by seeking to lock in profits on dollar-loonie trades.