The Trump trade might influence FX markets again
Aug 30 (Reuters) - Currency trends surrounding the U.S. election in 2016 could surface again with significant implications for both the dollar and Mexico's peso.
During the 2016 vote, fears that Donald Trump might win drove Mexico's peso much lower and also weighed on the dollar. While the dollar roared back when it appeared that the Republicans might gain control of both Senate and Congress, the peso dropped much further during his presidency.
This election is being tightly contested and uncertainty stemming from elections usually undermines currencies. That is likely to exacerbate the pressure on the dollar that has emerged ahead of the anticipated start of the U.S. easing cycle in September.
Potentially, pressure on the dollar could increase once rates begin to drop. A close outcome to the vote, which could make the passing of law harder afterwards, could have a significantly negative impact on the dollar.
That said, the U.S. economy is proving resilient, supporting expectations for a soft landing. This lessens the chance that the Federal Reserve embarks on the headlong rush to lower interest rates that is currently implied by futures.
If current expectations are met, the U.S. central bank will have almost completed the easing cycle within the next year. By any imagination this is stretch and traders who have sold short of the dollar may well be covering positions before the end of 2024, underpinning the greenback when the winner is announced.
The easing cycle, which will provide stimulus for already booming stock markets, should boost risk appetite, fuelling demand for Mexico's peso which has collapsed during a purge of carry trades. The peso's inability to rise following the flush of carry trades may be due to worries about a Donald Trump win and it's possible that traders short the peso ahead of the election.
For both currencies, which are no longer weighed down by potentially overcrowded investments that slowed their appreciation, short-term pain may be followed by longer-term gains.
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USD index and usd/mxn https://tmsnrt.rs/3TaHOVI
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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