(Bloomberg) -- Options traders are beginning to hedge against a Bernie Sanders victory in the race for a Democrat presidential candidate by betting on gains for the euro.
Less than two weeks before voters cast their ballots in the first nominating contest in Iowa, hedge funds have been buying euro-dollar call spreads -- essentially bets that the dollar could come under pressure -- should Sanders’ chances of a victory increase, according to a Europe-based trader.
That has helped raise the premium investors have to pay to position for a rally in the euro in coming months to near the highest level in two years, and may offer some support for the common currency. The euro has struggled against the dollar this year, falling to trade around $1.11, defying predictions in a Bloomberg survey for a recovery to $1.15 by end-2020.
“Investors tend to favor right-of-center candidates rather than left-wing ones and therefore it is unsettling that Sanders raised so much funding at the end of last year,” said Jane Foley, head of foreign exchange strategy at Rabobank in London. “That said, I would imagine that the U.S. presidential race will only become a significant factor for the dollar should polls show that Sanders or Elizabeth Warren can beat Trump in November,” she said.
Sanders, a self-described democratic socialist, is trailing Joe Biden by around 4 percentage points in Iowa, according to the RealClearPolitics aggregation of polls. He is in first place for the contest in New Hampshire in February. Sanders has proposed a wealth tax, a tax on Wall Street transactions and higher taxes to cover health care.
Billionaire money manager Jeffrey Gundlach said this month that his strongest market conviction is that the dollar will weaken, with the biggest risk to markets in 2020 being Sanders “becoming more believed-in.” Credit Suisse Group AG also thinks investors who aren’t “feeling” Sanders’ prospects risk being blindsided by the U.S. election.
The comments show trading political risk is rarely straight forward. Currency traders often use options before waiting for definitive moments to place significant wagers. Still, in the current low-volatility environment, placing bets on key events is relatively cheap.The Iowa caucus is on Feb. 3 and the volatility market suggests no fireworks are expected. Two-week implied volatility, which captures the event as well as policy meetings by the European Central Bank and the Federal Reserve, is trading around 4%, near record lows. That amounts to an expected range of 1.1040-1.1180 for the euro-dollar, according to Bloomberg pricing.
(Michael Bloomberg is also seeking the Democratic presidential nomination. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)
(Adds comment from Rabobank in fourth paragraph.)
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