An indicator that brings together the performance of emerging market currencies made gains this Monday (4), the day before the US elections, with investors reassessing their bets on Donald Trump’s return to the White House. This weekend, voting intention polls indicated that Vice President Kamala Harris was gaining ground in the main states in dispute, the swing states.
The MSCI index for emerging currencies rose 0.3% today, with the Brazilian real and the Mexican peso leading the advance amid a widespread reassessment of the so-called “Trump trade” — the series of protectionist measures that the Republican candidate promises to impose on partners commercials if elected.
Following the news, dollar indices fell the most in more than a month, while US Treasury bond yields fell. Bets on a Trump victory supported the dollar based on expectations of trade tariffs and inflationary policies that could force the Federal Reserve to maintain a tighter monetary policy stance.
“Latin American currency and rates are recovering as recent polls suggest a recovery in the Harris polls,” according to Citi analysts led by Ernesto Revilla. Still, “risk appetite remains low as outcomes can be binary, especially for some emerging market jurisdictions.”
READ MORE: Dollar at R$6.00 and pressure on interest rates: the contagion of the ‘Trump trade’ to Brazil
A weekend poll showed Harris with a lead in Iowa — a state Trump has won in each of his previous election contests.
The Brazilian real rose as much as 1.9%, its biggest intraday jump since August 23, as the currency recovered from Friday’s defeat, which was driven by growing concerns about the country’s fiscal outlook. The currency is now gaining on Trump’s trade devaluation as well as investor expectations that the government will announce spending cuts this week.
The Mexican peso, which suffered from Trump’s speech about imposing tariffs, rose as much as 1.6%, its biggest intraday gain since September 13.
Brad Bechtel, global head of foreign exchange at Jefferies, said he will be focusing on the Mexican peso and the impact of the election. Despite Harris’ advance in the latest polls, voters are narrowly divided, both nationally and in the battleground states that will decide the election.
I don’t think anyone has any idea what will happen tomorrow, although a huge amount of ink has been spilled trying to strategize about it. (…) However, it will most likely take a few days to eliminate all volatility, with things too close to be decided.
Brad Bechtel, Global Head of Foreign Exchange at Jefferies
READ MORE: ‘Trump trade’ would reorder trade flow, increase costs and provoke retaliation
A Harris win would likely lead to lower volatility and a reduced risk premium, according to Fredrik Repton, senior portfolio manager of global fixed income and currencies at Neuberger Berman.
“In this scenario, also if it is a divided government, the Fed may not have to keep monetary policy as restrictive and, in that case, we think the carry would come into play,” Repton said on Bloomberg TV, pointing to the Mexican peso and Brazilian real as attractive opportunities in such an outcome.
O carry trade is an investment strategy that involves taking out loans in a low interest rate currency and investing the capital in fixed income assets in a high interest rate currency, discounting exchange rate variation projections.
In addition to political risks, investors are also preparing for a series of central bank decisions this week, which could magnify market swings. The general expectation is that the Fed will reduce the pace of easing to a quarter point as the economy continues to be supported by resilient consumer spending.
READ MORE: All against one: dollar accelerates with ‘Trump trade’ and drops currencies around the world
Meanwhile, Brazil’s central bank is expected to raise its benchmark rate amid concerns about fiscal slippage.
MSCI’s gauge of emerging market stocks rose 0.7% on Monday, driven by a rally in technology after last week’s selloff. Shares of chipmaker Taiwan Semiconductor Manufacturing Company Ltd. snapped a four-day slide and posted their biggest gain in two weeks.
