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Mexican peso a barometer for US elections and risk sentiment

Volatility in the Mexican peso is at its highest level since 2011, driven largely by the possibility that Donald Trump will win November’s US election. Investors looking to take a view on the election outcome may consider trading the US dollar against the peso.

All trading involves risk. Losses can exceed deposits.

Republican US presidential candidate Donald Trump’s threats to build walls and deport migrants as part of a generally radical rhetoric has made Mexico perhaps the most targeted audience in terms of consequence of the upcoming US elections.

The US is its largest trade partner by far, accounting for more than 70% of Mexico’s exports and more than 50% of imports. Mr Trump’s suggestion that Mexico must pay for a giant wall and that the trilateral free trade agreement that includes Canada must be renegotiated are some of the catalysts for the peso trading at its highest levels of implied volatility since 2011.

It is no secret Mexico’s economy is linked to movements in the oil price, and the low price combined with high levels of debt are ailing the country. However, it does not appear to be coincidence that, as recent polls have shown, Trump’s campaign gains momentum, the peso has weakened. Further evidence of the currency’s link to the US presidential election is the sudden strengthening in the currency which followed the first presidential debate. 

Peso

The currency move accompanies perceptions that Democratic presidential candidate Hillary Clinton came out on top in the debate and seems to reaffirm the peso is providing a barometer to the probability of the election outcome.

The move on the peso was accompanied by gains in emerging market currencies, although these were less pronounced suggesting the peso is offering a higher degree of correlation to the event. The emerging market currency moves do highlight an appetite for riskier assets relative to the outcome of the election as well.

In a nutshell, a Donald Trump victory would provide volatility due to uncertainty, while a Hillary Clinton victory suggests increased certainty in continuity. Those looking to take a view on the election outcome might consider the US dollar versus Mexican peso as a vehicle to do so, with peso weakness an anticipated result of a Donald Trump victory and strength an anticipated result of a Hillary Clinton win.

Another factor to consider in this trade is the economic weakness in Mexico and what appears to be a current undervaluation of the peso.

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