To Hedge Against ‘Trump Risk,’ Bet Against Peso, Citigroup Says

  • U.S. race poses ‘clear risks’ to Mexico peso, strategists say
  • Peso may fall to as low as 22 per dollar should Trump win

Mexico’s peso looks poised for further declines as risks related to the U.S. presidential election increase, Citigroup Inc. said.

Given Republican nominee Donald Trump’s “anti-Mexico rhetoric, the U.S. election presents clear risks to the Mexican peso,” emerging-markets strategists Dirk Willer and Kenneth Lam wrote in a research note published Monday. They recommend buying dollar-call and peso-put options expiring Nov. 10 to bet on further peso weakness, and said the Latin American currency generally offers a good hedge for “Trump risk” in global portfolios.

Traders have singled out the peso, the most-liquid among emerging-market currencies, and boosted short positions this year to protect against everything from the U.K.’s decision to leave the European Union to emerging-market instability. It’s that dynamic that would likely cause the peso to weaken more than expected should Trump look close to winning the election, Citigroup said. Trump has advocated pulling out of free-trade agreements with countries including Mexico, as well as building a wall between the two nations.

“While in the end, campaign rhetoric may not become reality, not to mention serious doubts about the legality of some of the proposed actions, a high degree of uncertainties will weigh on the peso,” Willer and Lam wrote. “We don’t think the ‘Trump risk’ is in the price yet in a meaningful way.”

The warning comes as two newly released polls show the race between Trump and presumptive Democratic nominee Hillary Clinton tightening, with the Republican candidate getting a boost after his party’s convention.

The peso may weaken to a range of 21 to 22 per U.S. dollar should Trump win the election in November, Willer and Lam estimate. The Mexico peso declined 1 percent to 18.7445 at 1:05 p.m. in New York, extending its year-to-date tumble to 8.2 percent.

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