Hot trade of the moment? Think Mexican Peso (again) .....

Wednesday 28th September 2016

Hot trade of the moment? Think Mexican Peso (again) ..... Think Russian Rouble ..... In short, Think Trump

ref:- "This "Trump Trade" Marries Mexican Peso with Putin's Ruble" , Bloomberg Markets

We've mentioned a number of times how the Mexican Peso has borne the brunt of Donald Trump's remarkable ascent from an unlikely anti-establishment candidate for the Republican nomination to genuine contender for the Presidency. Selling the Peso has not been the only trade inspired by Mr Trump's rising political fortunes  --  they've been buying gold, and selling Canadian dollars and US Treasuries for the same reason  --  but it is the most high-profile one. Not surprising really, given his repeated trashing of the North American Free Trade Agreement and apparently sincere determination to build a wall along the US / Mexico border. Neither position bodes well for the Mexican economy.

It's been a very profitable trading strategy too, the Peso having dropped 10% in value against the US Dollar over the last six months. Monday's points victory for Hillary Clinton in the first presidential debate may have brought a little relief for the Mexican currency, but even Democrats would concede that it comes too early to be conclusive in any way and may not mean too much come November (or even next week, come to that).

But if short Peso / long US Dollar has been a good trade, short Peso / long Russian Rouble has been an even better one.  Even after the post-debate correction it has gained about 6% in September alone , about twice as much as selling the Peso against the dollar.

The Russian unit has benefitted from the increasing chances of a Trump victory even as the Peso suffers. In an interesting departure from the norm, this particular presidential candidate has been singing the praises of Russian president Vladimir Putin and his hardline style of leadership. If the prospect of Trump and Putin one day squaring up to each other is truly terrifying, for now the markets are keener to speculate that mutual admiration might bring about détente and a boost for the Russian currency.

If the "sell Peso" half of the trade is pretty much all about Trump, the "buy Rouble" side actually has other factors going for it. The search for yield is the mantra for investors in the modern era, and yields in Russia are some of the highest in the world. In part, double-digit interest rates reflect the so-called "Putin Premium" that investors demand given the current sanctions faced by Russia and the ongoing geopolitical tensions between Moscow and the West  --  tensions which, incidentally, would be alleviated by a Trump accession to the US hot seat (or so the theory goes). But high rates are also part of the fight against inflation conducted by a disciplined and respected central bank overseeing an economy gaining momentum  --  in stark contrast to that of ..... well, Mexico say.

So what are the holes in this trade ? Frankly, the idea that the relationship between such huge egos as those of Trump and Putin would be as much of a love-in as suggested seems unlikely to say the least, but that's a long-term consideration for what is likely to be a short-term trade. In all probabitility, a good many investors would be out of the trade before the election.  But for those that aren't, it's possible that a victory for Trump with all his protectionist leanings would be bad for all emerging markets across the board, including Russia.

Perhaps the most pertinent reason to think twice about this trade is the simplest. Over the last months the Peso has fallen a long way  --  how much room is there left to profit form a short Peso trade ? We often find ourselves saying in regard to various markets that just because a price seems cheap or expensive, that doesn't mean it can't get cheaper or more expensive. A lot can happen between now and the US election, and the fact that Mr Trump is still second favourite suggests there might be more mileage in a short Peso trade. But only the most convinced could be completely untroubled by doubts that getting in now won't be like arriving at the party just as it's about to finish.