Trump changes tariff stance, forex option traders' strategies make 180-degree turnaround in one day!

Notice that, less than a day after exiting bullish US dollar option trading, some leveraged funds returned to bullish US dollar option trading on Tuesday due to US President Trump updating his tariff stance. After Trump announced plans to impose tariffs of up to 25% on Mexico and Canada by February 1st, some hedge funds returned to the currency options market on Tuesday. If the US dollar rises against other currencies, especially the Canadian dollar, the value of these hedge funds will increase. A few hours ago, these hedge funds exited similar trades after Trump seemed to postpone further tariffs on trading partners. Mukund Daga, head of Asian foreign exchange options at Barclays Bank in Singapore, said, "The market is still figuring out how to trade a series of orders executed by Trump." Daga said that shortly after Trump's inauguration, bullish US dollar options against the Chinese yuan, euro, and Canadian dollar were closed out because Trump did not specifically mention tariffs. After announcing tariffs on Canada and Mexico, "we saw some speculative buyers of US dollar against the Canadian dollar re-emerge," he added. After Trump's election, there was strong demand for bullish US dollar options, as expectations of tariff increases intensified inflation concerns and helped push up US bond yields and the US dollar exchange rate. The US dollar experienced significant volatility on the first day of Trump's presidency, leading traders to see the potential for future fluctuations. As of 11:50 am Hong Kong time, US dollar options against the Canadian dollar were the second most traded currency pair on the Depository Trust & Clearing Corporation (DTCC), following only the euro against the US dollar. Jian Cao, Global Head of Foreign Exchange Options at Royal Bank of Canada Capital Markets in Toronto, said that going long on US dollar against the Canadian dollar through spot or options trading "has been a very popular trade in the hedge fund community over the past two weeks." Cao said, "We started to see some trades closing out on Monday." After Trump ordered his government to address global unfair trade practices rather than immediately imposing tariffs, the Bloomberg Dollar Spot Index posted its largest single-day decline since November 2023 on Monday. Nathan Swami, head of forex trading in the Asia-Pacific region at Citigroup in Singapore, said, "A sharp drop in the US dollar may provide an opportunity to reduce trades in certain situations, so we also expect long-term macro players to take advantage of this opportunity to re-enter trades at better levels."