As Wall Street Frets Over Trump, a Sure-Fire Short Trade Emerges

  • Citigroup and Barclays say shorting the peso would be a hedge
  • Mexican peso volatility has increased as short interest climbs

The Trump Effect Precipitating Mexican Peso's Fall

How do you hedge against a Donald Trump presidency? It’s a question Wall Street traders are increasingly asking.

QuickTake Short Selling

Citigroup Inc. and Barclays Plc say they have figured out at least one part of the answer: Short the Mexican peso. For any number of reasons, the currency would fall and fall quickly following a Trump victory in November, analysts at the banks say.

From seizing remittances to pay for a wall on the U.S.’s southern border to renegotiating the North American Free Trade Agreement to stepping up deportations, the presumptive Republican candidate’s proposals would hit Mexico’s economy hard if enacted and curb the steady flow of money into the country that supports the peso’s value. Even some of Trump’s policy flirtations that are wholly unrelated to Mexico -- such as restructuring U.S. debt if needed and re-examining trade with China -- would hit the peso because of the Latin American nation’s close ties to its northern neighbor and the way traders use the currency as a proxy for global risk.

“The only thing you are certain of is that if Trump wins, the Mexican peso will be weaker,” said Dirk Willer, a strategist at Citigroup in New York.

Already Hurting

Five months before Americans go to the polls, there are nascent signs that Trump’s ascent may already be hitting the peso. Since Ted Cruz dropped out of the race in early May, giving Trump a virtual lock on the Republican Party’s nomination, the peso is the worst performing currency in emerging markets. Expectations for swings in the peso, as measured by a gauge called implied volatility, have surged while large speculators boost their wagers in the futures market on further declines.

Granted, there is a litany of other reasons behind the peso’s slump to within about 2.5 percent of a record low -- everything from concern about how rising U.S. interest rates will lure money away from Mexico to financial struggles at the state-run oil giant. But many peso watchers attribute at least a small part of the 9.2 percent slide over the past six weeks to Trump’s ascendancy. The peso fell 0.7 percent to 18.9761 per dollar at 12:59 p.m. in New York.

Even if Trump were to ultimately opt against pursuing these policy ideas once elected, the peso would still be vulnerable until he made his intentions clear. “Listening to his rhetoric, you can tell the first country that would probably be affected would be Mexico," said Andres Jaime, a foreign-exchange strategist at Barclays in New York. The peso would be “a good hedge,” he said.

Clinton Factor

There are, of course, investors plotting how to hedge against a Hillary Clinton presidency as well -- things like betting against pharmaceutical and bank stocks. But because Clinton shares many of the same policy goals as President Barack Obama, a fellow Democrat, and because Trump is such an unconventional outsider, much of traders’ attention has been focused on him.

JPMorgan Chase & Co. published a note last month detailing the Mexican companies that would be hurt from the stepped-up deportation of undocumented immigrants. The move would damp U.S. economic growth, according to JPMorgan, hitting companies including tortilla-maker Gruma SAB and auto-parts producer Nemak SAB, which depend on U.S. demand. Mexico sends about three quarters of its exports to the U.S., including cars, refrigerators, oil and textiles.

There are signs that Mexican authorities may be bracing for the Trump effect as well. Last month, the government unexpectedly boosted its credit line with the International Monetary Fund to $88 billion. While the Finance Ministry has said the decision was tied to external risks such as a slowdown in the world economy, analysts at Grupo Financiero Banorte SAB speculated the move was in part designed to withstand the outflows that could follow a Trump victory.

“The worry is there,” said Guillermo Ortiz, who has served as a central bank governor and finance minister and is now Mexico chairman for BTG Pactual Group. “The question of how a Trump presidency would impact Mexico is on the minds of everyone.”

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