The Trump (currency) Trade

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/MXNpair, 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.