After Round Two: The Effect of ‘Trumponomics’ on Emerging Market Assets 4
Republican presidential nominee Donald Trump stands next to Democratic presidential nominee Hillary Clinton during the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Julio Cortez)

The Second Presidential Debate Through the Lens of Market Sentiment: Donald, Hillary and Emerging Market Assets

Last night’s second US presidential debate between Hillary Clinton and Donald Trump was loaded with heated discussions and accusations. But amidst the inflamed rhetoric, there was very little focus on policy – and particularly on economic policy. As we speak, every political blog on Earth is working overtime to dissect “what it all means”. So instead of adding to the noise, we will focus on what we do best – which is to assess how this unprecedented election cycle will impact emerging market assets.

And the Winner Is…

With yesterday’s 90-minute debate now several hours behind us (the debate’s official start was scheduled for 9:30pm EST), several of the most recent and most-widely watched polls indicate that Hillary Clinton emerged as the winner: A Post-debate poll by YouGov revealed that 47% of 812 registered voters who watched the debate favored Clinton, while 42% saw Trump as coming out on top. RealClearPolitic’s General Election Poll currently shows Clinton at 47.9%, while Trump dropped to 43.0% over the last couple of days. Readers interested in a running list of recent elections polls, can find regularly updated information here.

Polls? Who Cares… Use Emerging Market Assets to Gauge Trump’s Election Chances!

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Let’s turn our attention to one particular emerging market asset that shows one of the highest (inverse) correlations to changes in Trump-Clinton Presidential polls: The value of the Mexican Peso versus the US-Dollar (USD/MXN).

 Trump Emerging Markets

As the chart above powerfully illustrates, whenever Trump’s electoral probability increased during the past couple of months, the value of the Mexican Peso declined versus the US-Dollar. Naturally, in periods during which Trump’s popularity decreased – and Hillary Clinton’s likelihood of winning increased – the currency rallied sharply.

The reason for the inverse correlation of Trump’s chances to win the presidential election and the value of the Mexican Peso – which is the most-liquid emerging market currency following the Chinese yuan – lies in Trump’s repeated announcements that he will renegotiate or leave NAFTA (North American Free Trade Agreement) when elected president. According to prepared remarks distributed by his campaign in June, he stated that:

“I’m going tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don’t mean just a little bit better, I mean a lot better.      and

“If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal.”

The Mexican Peso’s vulnerability to Trump’s plans regarding NAFTA is quite plausible: According to data from the IMF, trade between Mexico and the US has grown fivefold to ~$500 billion in goods on an annual basis since NAFTA was initiated in 1994. This makes Mexico the biggest US trade partner after China and Canada, while the nation exported 73% of its goods to the US in 2015.

What is the Mexican Peso Telling Us About the Debate’s Winner This Morning?

Applying the general logic explained throughout this article to yesterday’s debate and trading in USD/MXN this morning, it becomes quite evident that markets are pricing in Hillary Clinton as the winner of the second presidential debate. Take a look at the illustrative chart below to understand the dynamics in USD/MXN: trump emerging markets

The chart above shows clearly that Trump’s chances to win the presidential election were heavily hurt over the weekend as USD/MXN plunged at the open of FX trading. Throughout the debate, the Republican nominee was able to make up some ground, but as traders are returning to their desks this morning, MXN is gaining in strength again, indicating that market participants are establishing short positions in USD/MXN at the beginning of this week.

Generalizing Emerging Market Asset Reactions to Presidential Election Polls

Throughout this article, I used the Mexican Peso for illustrative purposes. On a more general level, the point is that trading opportunities in various Emerging Market assets exist between now and the Presidential Election Day on November 8, 2016.

Consider, for instance, that traders in Asia pushed the Shanghai Composite Index (SHCOMP Index) higher ~1.5% in overnight trading. Additionally, Brazil’s Sao Paulo Stock Exchange Index (IBOV Index) posted a gain of ~0.8% on Friday in anticipation of the Clinton-Trump showdown. Relatively risky Government Bonds in emerging markets are also bid this morning, including Turkey’s 10yr Government Bond. Taking a look at odds offered for the presidential election on November 8, 2016, Paddy Power currently offers 2/9 for a Hillary Clinton Win, while the odds for a Trump win are at 10/3. Oddschecker.com offers an informative overview of odds at various betting houses. Currently, odds seem to be in favor of a Clinton win.

Trade Suggestion

While it is certainly possible to play short-term political news relating to Trump’s presidential election odds in various emerging market assets, the highest correlation still persists in MXN/USD. For this reason, the I suggest the following FX spot trade:

Short USD/MXN on daily close below the 18.9000 Support Level

If you believe that the Mexican Peso is likely to regain in strength between now and the presidential election on November 8, 2016, I suggest establishing a short position in USD/MXN once the currency pair closes below the 18.9000 support level. The rational is that polls are likely to favor Hillary Clinton during the next weeks as American voters have more time to digest the economic and political implications of a Trump presidency. In addition, USD/MXN is trading very close to the current support area at 18.9000 (previous double-top resistance as shown in the chart below) and is currently attempting to break to the downside. This is shown in the chart below:

Trump Emerging Markets

Place careful attention to a daily close below the current support level before establishing a short position in the spot market. On a downside break, I suggest taking 60% of invested capital at the psychologically-important 18.5000 level, while holding 40% of capital throughout the election. In case of a win by Hillary Clinton, USD/MXN will fall further and profits should be taken at the 18.0000 levels. After entering the short position, place a stop-loss at 19.5000 in case an unexpected event (i.e. another negative report on Hillary Clinton’s health) will occur.

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