(Bloomberg) — Hedge funds and other asset managers are ramping up bets on dollar weakness using options, in a sign the market is turning even further against the US currency as haven demand wanes.
Trading in euro-dollar options jumped by nearly 60% on Friday, while demand for euro calls, which profit from gains in the shared currency, outpaced that of puts by about 30%. The volume of call options on the Australian dollar, which is seen as a barometer of risk sentiment, was more than 50% that of puts on both Friday and Monday.
The dollar slipped Monday — extending April’s decline — as signs that the US and Iran are moving closer to a lasting ceasefire add to bearish sentiment toward the world’s reserve currency.
“We’ve seen both hedge funds and real-money clients chasing this dollar lower move over the past 24-to-48 hours in most Group-of-10 pairs in the option space,” Jian Cao, global head of foreign-exchange options at RBC Capital Markets in Toronto, said Friday.
Bloomberg’s dollar index has slipped 1.9% this month as the US and Iran have managed to maintain a temporary ceasefire even though talks between the two sides over a lasting peace have so far proved fruitless. Traders are now waiting for the outcome of the next round of negotiations that are thought may take place before the current ceasefire expires.
Meanwhile, implied volatility — a measure of expected future movement and a key factor in the price of options — has remained relatively low for most currency pairs despite the uncertainties over the Middle East conflict.
The low volatility “makes buying outright US dollar put or put spreads very cheap,” RBC’s Cao said. Put spreads limit potential gains from further declines, but reduce upfront costs compared with standard, or outright, put options.
Trading in European markets also indicates funds are turning more bearish on the greenback.
US-dollar-weaker flows have been in focus since the de-escalation in the Middle East, said Sagar Sambrani, a senior foreign-exchange options trader at Nomura International in London. “The euro, Australian dollar and Canadian dollar have been the preferred currencies for this play.”
Foreign-exchange markets consolidated Monday awaiting further developments from the Iran-US talks as well as Kevin Warsh’s confirmation hearing for Federal Reserve chair, Sambrani said.
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