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Day 6

What the Mexican peso can tell us about Donald Trump's presidential prospects

This week’s polls suggest Hillary Clinton won the first presidential debate — but currency watchers knew that even before the data had been crunched. Within the first 30 minutes of the debate, the Mexican peso's value increased a full percentage. Juan Carlos Alderete, a strategist with Mexico's third largest bank, says the peso's value has been directly tied to the odds of a Donald Trump presidency for months.
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Republican nominee Donald Trump and Democratic nominee Hillary Clinton face off during the first presidential debate at Hofstra University in Hempstead, New York on September 26, 2016. (PAUL J. RICHARDS/AFP/Getty Images)
Day 67:00The value of the Mexican Peso tells you all you need to know about whether Donald Trump will be President

by Brent Bambury (@notrexmurphy)

Economists who've studied the correlation between stock prices and Presidential elections say that since 1880 no candidate has moved the markets by more than a few percentage points.

But as with so much else, this election is different.  There's evidence a Trump victory would have a significant effect on the stock market, driving prices down by 10-12%.

Those numbers come from extrapolating market activity during the 90 minutes of Monday's debate. As Clinton gained the advantage, and Trump appeared to shrink, broad-based indexes like Standard  & Poor's rallied. The markets moved up as the likelihood of a Trump presidency decreased.

Trump vs. the peso

There was another index responding to Trump's bad night. Over the same 90 minutes, economists noticed a big jump in the value of the Mexican peso.  But in Mexico, the correlation between the value of their currency and the Trump-Clinton contest has been clear for some time.

As soon as they saw Hillary Clinton was winning the debate, the markets reacted instantly with a really steep appreciation of the peso.- Juan Carlos Alderete

Juan Carlos Alderete is an FX Strategist at Banorte, which is Mexico's third-largest bank. He's responsible for forecasting the bank's exchange rates and advising clients on trade and investment.

He says the Trump effect on the peso was known to him as early as May, just after the Indiana primary.

The Mexican Peso versus Donald Trump (SOURCE: Oanda)

"We have identified at least two other episodes which were really clear that the correlation was strong," he told me on CBC's Day 6.

'The first one was when both Ted Cruz and John Kasich retired from the race.  And that meant that Donald Trump became the virtual nominee."

"From that moment on, the Mexican peso actually depreciated rather strongly until we knew that Clinton had the necessary delegates to actually secure the Democratic candidacy."

Clinton falls and so does the peso

The next tumble for the peso hinged on the event that spiked Trump's poll numbers and closed the gap in the race: Clinton's collapse at a public event on September 11th and the subsequent disclosure of her bout with pneumonia.

"You see a really significant spike in favour of Trump when Clinton announced her pneumonia case," Alderete recalls.

It was a disaster for the peso.  

"We had a very steep depreciation up until that debate," says Alderete. "The Mexican peso had a new record low in terms of its value against the dollar."

A man reads a newspaper showing images of the US presidential candidates debate, in Mexico City on September 27, 2016. (YURI CORTEZ/AFP/Getty Images)

The markets chose the winner

So on Monday, even though the North American markets had been closed for hours when Clinton and Trump took the stage, the perception of a Clinton victory instantly put pressure on the currency.

"Given that the Mexican peso trades almost 24/7, the move was mainly in Asian markets," Alderete says, "And as soon as they saw that Hillary Clinton was winning the debate, the markets reacted instantly with a really steep appreciation of the peso during that first 30 minutes."

By the end of the session the peso was up 2.5%.

I asked Alderete why he though Clinton looked stronger than Trump.

"I believe she was really confident," he says.  "She looked really healthy and she was very assertive in her comments. She also threw some bait to Donald Trump and Donald Trump was really nervous and not prepared for the debate. So I believe markets saw that instantly and reacted accordingly."

Other markets are wary

It's not just the Mexican peso that's responding to changes in the Presidential campaign. Alderete says there's been pressure on other currencies, including the Canadian dollar.

"We have seen some signs that the Canadian dollar actually is showing some of the same trends we saw in the early stages of the Mexican peso," he says.  "So investors are probably also considering potentially harmful effects from [a] Trump win to the Canadian dollar."

But it is Mexico's economy that may have the most to fear from a Trump victory. The British pound lost 10% of its value after the Brexit vote. I wondered what the peso would look like in mid-November after a Trump victory. Did Aldrete think the peso could be hit as badly as the pound?

"Yeah we believe so and maybe even more badly. One thing that I believe the markets will learn from the Brexit experience is to expect the unexpected."

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