Now that the second U.S. presidential debate has concluded, let’s take a look at what the numbers are saying and how the markets could react to the upcoming elections.
Here are some tendencies that you gotta take note of.
1. Mexican peso as an indicator?
Many say that the Mexican peso’s price action can be considered an indicator of who might win this year’s elections.
And that’s not just because one contender has promised to build a YUUUGE wall across the border and renegotiate the North American Free Trade agreement that lifts trade barriers with Mexico, but it turns out that the peso has been widely sold as a hedge against other emerging market currencies in times of market uncertainty.
In the past few months, the Mexican peso has been observed to weaken whenever GOP nominee Donald Trump advanced in the polls and has recently surged roughly 2% against the U.S. dollar after the first presidential debate seemed to favor Democratic candidates Hillary Clinton.
But before you load up on long Mexican peso positions in anticipation of a Clinton victory, keep in mind that Mexico is also dealing with weak fundamentals, particularly an economic contraction in the midst of rising inflation.
This left the Mexican currency as the worst performer in the emerging market currencies gang, and the losses could increase if Trump wins the presidency.
2. Risk Appetite & Political Parties
It is said that Republican policies tend to be more favorable to businesses, which suggests that a win by the GOP nominee could be positive for U.S. equities.
However, historical performance according to Ned Davis Research also reveals that the stock market tends to do better when the incumbent political party (in this case, the Democrats) wins the election.
If these equity indices are to be considered proxies for overall market sentiment, it can also be inferred that risk appetite could react most favorably when the incumbent party wins the White House and the other political party has control of the Congress.
3. Democrats & the Dollar
Historical forex price action suggests that the Greenback does better under Democratic leadership, as this graph of the currency’s real effective exchange rate indicates.
There have been exceptions, though, particularly the dollar rally in the early 80s when former Fed Chairman Volcker aggressively hiked interest rates and the sharp USD selloff that occurred in Obama’s first term during the aftermath of the financial crisis.
Of course, the U.S. dollar does have a few more points in its favor these days, as the prospect of a Fed rate hike (and an actual one!) can keep the U.S. currency afloat in the coming months regardless of who ends up as commander-in-chief. Apart from that, the risk-off environment in the global markets leading up to the Brexit negotiations early next year could also support the safe-haven dollar.