The Trump (currency) Trade

Confusion is running amok in the financial markets ahead of what many are calling the election of the Century.  To be honest, each election is touted as the most significant in a generation because that is what sells newspapers and attracts television viewers.  But I think we can all agree this particular election will play a big role in the future of the United States, its trade partners, and global market participants.  Accordingly, the stock, currency, and interest rate markets will be reacting to polls, debates, and maybe even unfounded rumors.  In short, this could be a wild ride.

Before we begin, I’d like to point out that this is not intended to be a political piece advocating one candidate over the other.  It is strictly a discussion of how markets have been behaving and might behave as the election cycle moves forward.

In this article, we intend to focus on the less talked about impact of a Trump or Clinton US Presidency, the currency markets.  Because the Clinton platform is focused on a continuation of current policies, we will focus on the impact of Trump policies on the markets as voter sentiment and polls fluctuate.

In light of Trump’s intention of building a wall between US and Mexico and his disdain for NAFTA, it is reasonable to assume that a Trump victory could spell trouble for the Mexican peso.  On the flip side, other currency speculators are noting that a Trump presidency could give support to the Russian ruble and put pressure on the US dollar in relation to most of the major currency pairs. Naturally, it is impossible to predict who will win in November and equally as difficult to predict how the market will react but there are trades that are more likely to work in the environment that each candidate is proposing.  Thus, aggressive traders might want to dip their toes in on the “Trump trade”.

Peso and Ruble

Spot FOREX traders have been voicing a desire to play a cross pair between the Mexican peso (MXN) and the Russian ruble (RUB).  The premise suggests that these two currencies would trade inversely overall, meaning if the ruble strengthens against major currencies the peso would weaken, and vice versa.  Of course, pairing these two currencies against each other eliminates the noise brought by their valuation relative to other currencies such as the US dollar.

This inverse price action between the ruble and the peso are exactly what is expected to happen, at least initially, should Trump take hold of the polls and eventually the White House.  On the other hand, should Clinton gain momentum going into the big day the market will likely react in a manner that strengthens the peso and weakens the ruble (keep in mind the currency markets have already priced in some peso weakness and ruble strength in September as Trump began polling better among voters).    In any case, expectations of a strong negative correlation cause this trade to be a highly leveraged and potentially lucrative one for those on the right side or dreadfully painful trade for those on the wrong side.

Unfortunately, most spot FOREX brokers don’t offer speculative trading in a cross pair between the ruble and the peso due to a lack of liquidity and their inability to introduce clients to a viable marketplace.  Nevertheless, traders can accomplish the same goal using the USD/RUB pair in combination with the USD/MXN pair.  In essence, a trader selling one pair and buying the other is mimicking the ability to trade a RUB/MXN cross pair.   This is because exposure to the USD currency is essentially offset while exposure to the ruble and peso remain active.   Specifically, a trader convinced of a Clinton victory might buy the USD/RUB pair is essentially buying the dollar and selling the ruble.  The same trader could sell the USD/MXN pair, which is selling the dollar and buying the peso.  You’ve probably noticed that the trader has no exposure to the dollar because he is short in one pair and long it in the other.  Thus, the net result is a short ruble and long peso trade.

I tend to favor currency trading in the futures markets as opposed to spot FOREX; specifically, the currency futures traded on the Chicago Mercantile Exchange.  This is because CME currency futures products are traded on a centralized marketplace with hefty regulation relative to spot FOREX.  That said, a futures trader could choose to trade the peso or ruble against the US dollar by simply buying or selling the appropriate futures contract. 

For example, in the futures markets all currencies are paired against the dollar automatically with the dollar being the quoted currency (all futures market currencies are quoted in the price of the US dollar).  For instance, if the euro currency futures contract is trading at $1.28, it is equivalent to saying it takes $1.28 to purchase a single euro.  A trader believing Donald Trump will succeed in becoming President of the United States could choose to purchase a Russian ruble futures contract to take action on his view, sell a Mexican peso futures contract, or both. 

Japanese Yen

In the wake of the financial crisis, currency market participants have deemed the Japanese Yen to be a safe-haven during times of economic duress.  Due to the perception of uncertainty in regards to a Trump presidency, we could see buyers flock to the Yen from other major currencies as an attempt at hedging economic risk.

Conversely, a stronger Yen is the opposite of what is desired by the Bank of Japan (BOJ) and the BOJ has been known to interfere with the floating valuation of its currency.  Accordingly, any Trump rally in the Yen will likely be relatively temporary.

There are various FX pairs that can be utilized to speculate on the value of the Yen, but we prefer the idea of using the CME’s currency futures suite for reasons previously mentioned.   There is a full sized Yen futures contract, a mini contract, and even an e-micro contract enabling traders of all sizes and skill levels the opportunity to participate in a transparent, centralized, efficient, and regulated marketplace.   If you are interested in learning more about the benefits of trading currencies using e-micro contracts this is a topic, and many others regarding currencies and commodity speculation, is discussed at length in my latest book, Higher Probability Commodity Trading.

US Dollar

Should Donald Trump’s poll numbers improve going into the election, currency traders focused on the greenback will most likely be in a state of confusion.  Trump’s stance on a trade policy overhaul is undoubtedly bearish for the dollar, but his opinion in regard to the necessity of interest rates to normalize would offer support to the US currency (investors tend to allocate money to assets backed by currencies with higher relative rates of interest). 

The million dollar question will be which argument will “trump” the other in the short-term.  In our view, the direction of the dollar going into an election with Mr. Trump in the running for a victory will likely be lower for no other reason that uncertainty.  A complete regime change would not only prevent overseas investors from putting fresh money to work in US based investments, but it might also lure money away from such investments. 

Those looking to speculate in the greenback can do so most efficiently using the DX futures contract traded on the ICE (Intercontinental Exchange).   I like to call the DX the mutual fund of the currency market; it is essentially the value of the US dollar paired against a weighted basket of global currencies.

In conclusion

If recent price action in the financial markets is any indication, doubt and hesitation will be the primary driver in the currency markets as we head toward the November 8.  For those willing to be aggressive, there could be opportunities in the currency market lurking, but in reality, elections are highly uncertain events that can change with the wind...so will the currency markets.  Case in point, a month ago Trump was ruled out as a viable winner and is now jockeying for position in a statistical dead heat race!

*There is a substantial risk of loss in trading commodity futures, options, ETFs.  Seasonal tendencies are already priced into market values.