(Nov 12): Currency traders have placed new bets that the euro and yuan will be the hardest hit as US president-elect Donald Trump’s proposed tariff policies result in a stronger dollar.

Investors have been buying dollar call options primarily against these currencies since Trump’s victory last week, according to foreign exchange traders. Euro-dollar and dollar-yuan options were the most heavily traded contracts on Monday, data from the Depository Trust & Clearing Corp showed.

Dollar-yuan call option trades worth at least a notional US$100 million (RM443.27 million) on the DTCC outnumbered their put-option equivalents by a ratio of 3 to 2. Such wagers would benefit if the offshore yuan weakens against the greenback.

“During the latter part of last week, investors tactically traded the noise” around the Federal Reserve decision and China legislative meeting, said Ivan Stamenovic, head of Asia Pacific G-10 FX trading at Bank of America. “But following announcements that fell short of expectations, we are seeing fresh interest in rejoining stronger USD trades, especially against EUR and CNH.”

The US election result has prompted a flurry of trades that are designed to profit from a stronger dollar, as Trump’s plans to cut taxes and boost tariffs are expected to stoke inflation. With the Republicans favoured to win the House, the party looks set to control both the legislative and executive branches of government next year — an outcome that’ll make it easier for Trump to implement his campaign policies.

While a stronger dollar would have broad-based implications, traders are zeroing in on the yuan as Trump has threatened to slap a 60% flat fee on Chinese goods on top of a universal 10% tariff on everything the US imports.

Political risks are also at play in the case of the euro. German Chancellor Olaf Scholz said he’s open to moving up a parliamentary confidence vote by several weeks to before Christmas, potentially speeding up the country’s early election to February. On the policy front, European Central Bank Governing Council member Robert Holzmann has said a December interest rate cut is a possibility but by no means guaranteed.

“A lot of clients trading into the Asian time zone are now looking at using options to express their views of a higher dollar especially against the euro, yen and offshore yuan,” said Niraj Athavle, head of sales and marketing Singapore and global clients APAC at JPMorgan Chase Bank's Singapore branch. That’s due to the US elections and expected divergence both on growth as well as rate differentials, he added.

Implied volatility for major currencies, a measure of expected future movements, has been rising this week after collapsing on US election day and in the wake of the results. A gauge of expected swings in dollar-offshore yuan over a six-month period has climbed above the level it was at the day before the vote, while the same tenor for euro-dollar rose to the highest since June on Monday.

“In USD/CNH, the sentiment is more that the currency pair reaches 7.35-7.40 levels, while in EUR/USD, people are playing for a move toward parity” said Mukund Daga, Singapore-based head of FX options for Asia at Barclays Bank Plc. “Outright European digital buying is one of the most common structures with expiries ranging from three months to one year.”

A European digital call option provides the traders with a fixed payout when the market price of the underlying asset exceeds the strike price at expiration. The opposite is true in the case of a put option.

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