Trump's tariffs effect on forex market, tariffs, which are taxes imposed on imported goods, can significantly influence the dynamics of the foreign exchange (Forex) market.
After President Trump's announcement regarding potential tariffs on Mexico and Canada, dollar buyers have made a comeback. Citigroup suggests that the recent decline in the dollar may present a buying opportunity.
Following Trump's update on tariffs, some leveraged funds reversed their positions just a day after exiting bullish dollar options trades. On Monday, Trump indicated plans to impose tariffs of up to 25% on imports from Mexico and Canada before February 1. This prompted several hedge funds to return to the forex options market on Tuesday, betting on the dollar's strength against other currencies, particularly the Canadian dollar. This shift occurred just hours after media reports suggested that Trump might delay further tariffs on trade partners.
"Markets are still trying to figure out how to trade Trump's tariff policies," said Mukund Daga, head of Asian forex options at Barclays Bank Plc in Singapore. He noted that following Trump's inauguration, positions for bullish dollar options against the yuan, euro, and Canadian dollar were unwound, as Trump did not specifically mention tariffs at that time. However, following the announcement of the 25% tariffs on goods imported from Canada and Mexico, speculative buyers of dollar call options, especially against the Canadian dollar, began to reappear.
Since Trump's election victory, demand for bullish dollar options has surged. Expectations of higher tariffs have heightened inflation concerns, contributing to rising U.S. Treasury yields and strengthening the dollar. On the first day of Trump's presidency, the dollar experienced significant volatility, allowing traders to anticipate future market fluctuations.
As of 11:50 AM Beijing time, the dollar versus Canadian dollar options was the second most active option traded by the Depository Trust & Clearing Corporation (DTCC), following only the euro-dollar options in trading volume on Monday.
Jian Cao, global head of forex options at RBC Capital Markets, stated that going long on dollar-CAD through spot or options has become a popular trade among hedge funds over the past two weeks, although some positions began to see profit-taking on Monday.
Bloomberg's dollar index faced its worst day since November 2023 on Monday, as Trump ordered his administration to address global unfair trade practices rather than immediately impose tariffs.
"In some cases, a broad sell-off in the dollar may provide a buying opportunity for pullbacks. We expect long-term macro funds to take advantage of this opportunity to re-enter trades at more favorable levels," remarked Nathan Swami, head of Asia-Pacific forex trading at Citigroup in Singapore.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
