Donald Trump’s controversial presidency campaign has had an impact in the FX markets, most notably in the Mexican Peso and to a lesser extent on the Russian Ruble. While the RUB/MXN cross pair has been renamed by some as the ‘Trump Trade’, this is a very unusual cross which is hardly offered by the majority of brokers. However, those who wish to take advantage of the recent volatility in this lesser-offered currency pair can do so by creating a synthetic currency pair.
In essence, the process for doing this is to choose two pairs which contain a common currency (for example, the US dollar) against each of the two currencies which the trader seeks to trade. By taking opposing positions in the two markets the exposure to the common currency is cancelled out, leaving just the synthetic pair.
If we take the Trump Trade as an example, which has recently surged in popularity due to its sensitivity to US republican nominee Donald Trump’s performance in the polls, we explain how you could create a synthetic RUB/MXN using the far more liquid and widely-traded pairs of the USD/RUB and USD/MXN.
A long position in RUB/MXN would consist of a short in the USD/RUB, and a long in the USD/MXN:
Short position in: USD Short
You can short the USD and long the RUB:
Long position in: USD Long
In another trade, you can go long on the USD and short on the MXN, resulting in the two positions combining to give you the following setup:
Combined position: USD Short USD Long = RUB Long
RUB Long MXN Short MXN Short
The opposing positions (long and short) in each pair would cancel out the USD exposure (shown in red). Therefore, you are left with a long position in the RUB and short position in the MXN.
CFD’s, Options and Forex are leveraged products which can result in losses that exceed your initial deposit. These products may not be suitable for all investors and you should seek independent advice if necessary.
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