Threats by the Republican presidential candidate Donald Trump to build higher walls, deport migrants and a generally radical rhetoric has seen Mexico become perhaps the most targeted audience in terms of the consequences of the upcoming US elections.
The US makes up by far the largest trade partner for Mexico and accounts for more than 70% of exports and more than 50% of imports for the country. Trump’s suggestions that Mexico must pay for a giant wall and that the trilateral free trade agreement (which includes Canada) must be renegotiated are some of the catalysts for the Mexican peso trading at its highest levels of implied volatility since 2011.
It is no secret that the Mexican economy is linked to movements in the oil price and struggles with high levels of debt which are also providing ailment to the region at present. However, it certainly does not appear to be a coincidence that as recent polls have shown that Trump’s campaign has gained in momentum, so has the peso weakened to its worst levels. Further evidence of the currency’s link to the US presidential elections is the sudden strength in the currency which followed the first presidential debate highlighted on the chart below.
The currency move accompanies what has widely been received as a debate win by Democratic presidential candidate Hillary Clinton and seems to reaffirm that the Mexican peso is providing a type of barometer linked to the probability of the election outcome.
The move on the peso was accompanied by gains in emerging market currencies although these were much less pronounced suggesting the peso to be offering a higher degree of correlation to the event. Although it should be considered that the emerging market currency moves do highlight an appetite for riskier assets relative to the outcome of the election as well.
In a nutshell, a Trump victory would provide volatility in uncertainty, while a Clinton victory could suggest an increased certainty in continuity. Those looking to take a view on the election outcome might consider the dollar vs Mexican peso as a vehicle to do so, with peso weakness an anticipated result of a Trump victory and strength an anticipated result of a Trump loss. Movements in the currency pair (devoid of the election) might see weakening economic conditions tempered by what appears to be a relative undervaluation of the Mexican currency at present.