Emerging-market currencies have spent much of the post-crisis world locked in a dance with the U.S. dollar.
As currency traders—and consumers—who've learned that the employment prospects of engineers in Minneapolis have a greater effect on their purchasing power than political developments at home know full well, dollar strength has tended to correlate with the weakness of currencies perceived to be riskier. If a Trump presidency were to cause the dollar to devalue, it stands to reason that this would bode well for emerging-market currencies.
Not so fast, say analysts at JPMorgan Chase & Co. While a November victory by the flaxen-haired real-estate magnate would weaken the dollar vs. other developed-market currencies, they predict that high-beta currencies such as those from emerging markets would weaken even more.
The forecast has a lot to do with the trade policies that have formed such a noisy part of the Republican nominee's campaign. "A greater probability of a Trump presidency should be associated with a greater dollar discount versus reserve currencies (and gold), but also a larger risk premium for high-beta currencies, especially ones more dependent on global trade," as the analysts, led by Alex Roever, put it.
The first part of JPMorgan's proposition—that of a bigger discount, or lower dollar—is relatively simple. It rests on the historical affinity between trade tensions and weakness in the greenback.
Although Hillary Clinton has previously spoken about reevaluating the U.S.'s obligations under the North American Free Trade Agreement, that rhetoric has been largely absent from her current campaign, according to the analysts, who therefore view a Trump victory as posing a bigger risk to these relationships. The Republican candidate has cast doubt on U.S. membership in the World Trade Organization as well as NAFTA, and he has spoken of imposing tariffs on China.
"Given what we view as the much greater probability of global trade tensions rising under a Trump presidency compared to a Clinton one, we would expect a dollar discount versus other reserve currencies like EUR, JPY, CHF and a gold rally if the probability of a Trump win rises."
Beyond these reserve currencies, there's negligible benefit from the dollar discount. Instead, non-U.S., non-reserve currencies weaken in accordance with their dependency on the U.S.
"The magnitude of the risk premium will likely correspond to the overall economic dependence on trade, as well as the weight of the U.S. trade relationship," JPMorgan says.
If you discount NAFTA members Mexico and Canada, which exchange around half their goods and services with their giant neighbor, uncertainty would most unsettle emerging Asian economies, which are among the most dependent on U.S. trade.
More than half the world's most open, or trade-dependent, economies are also in East Asia, as this chart shows.
You don't have to wait till November to trade trade, however.
"As the general election approaches and market attention shifts more squarely to U.S. political risks, we are likely to see the general uncertainty risk premium on the dollar grow, all things being equal," the analysts conclude. "But we are also likely to see a growing relationship between the performance of a basket of non-USD reserve currencies versus a basket of the dollar and other trade-dependent currencies vary directionally with the probability of a Trump win."