Donald Trump’s presidential candidacy is apparently generating quite a stir in Wall Street. A recent article on Bloomberg quoted Citigroup and Barclays saying that one of the tools available to investors who want to hedge against a potential Trump presidency, is to short the Mexican peso. The same article goes on to show how the Mexican peso has underperformed as compared to any other emerging market currency, since Ted Cruz dropped out of the presidential race. Apparently the markets are not taking any chances, and are gearing up for what would be a huge surprise in November. That is precisely where the opportunity to go counter-cyclical arises.
The fact of the matter is that Trump’s success in the general election is still a long shot, according to almost every poll taken so far. But even if Clinton is defeated, it would be quite naïve to believe that president Trump will indeed follow through on his campaign promises. Politicians have a tendency to make a lot of campaign promises, and then keep few of them while in office. Although Trump is not a politician, he will also have to grapple with reality if elected, and the campaign promises that are keeping the Mexican peso down, will not be as easy to implement.
President Trump would have to go through all the legal mechanisms in place to pass the legislation necessary to keep his promises. His initiatives will be met with staunch opposition. One of the most prominent examples comes from Obama’s push for health care reform. It took Obama more than a year, working with a congress that was under the control of Democrats to pass Obamacare. The Donald doesn’t even have the same level of support among Republicans that Obama had among democrats back then. This means that probably most of his proposed changes to NAFTA or even the initiative to build a wall on the border with Mexico, and pay with it with remittances from Mexicans in the US, are not likely to get the support needed to become a reality.
It is thus possible that the best move in forex markets right now, is precisely to open long positions on the Mexican peso. Investors who are interested in trading according to the results during the election in November, would be wise to take all the economic data coming out of Mexico under consideration, as well as the possibility that Hillary beats the Donald. It would be foolish to automatically follow Citigroup and Barclays’ lead and hedge against the Trump doomsday scenario, without considering the whole picture. The huge Trump hedge can well be a futile effort.