Originally published by AxiTrader
The re-emergence of Hillary Clinton's email problems knocked stocks, bonds, and the US dollar a little lower on Friday night. But while there have been vast quantities of copy written about the issue there are scant signs in markets so far this week that traders and investors are worried that the news will move the needle on Trump's numbers enough to get him to the White House at the November 8th presidential election.
S&P futures were largely unchanged in overnight trade, US bonds hardly moved, and the US Dollar was a little better bid from almost the moment Tokyo traders put their feet under the desk on Monday morning.
Perhaps the relative calm in markets could mean that traders have become more comfortable with a Trump presidency. But more likely traders are betting that even though it appears Trump is surging in the polls again the odds are still that Clinton will triumph. Indeed while Nate Silver has Clinton at a low point for her campaign at a 75.8% chance of winning she still looks a shoe in.
Now naturally we'll be able to tell if this sanguine outlook changes if the S&P 500 falls below the 5 month low of 2114 at some point this week. But given the lack of volatility in the S&P 500 recently it's not necessarily the case that we'll be able to gauge market sentiment just by watching stocks.
So in thinking about how we might be able to tell if markets become materially worried about the chances of a Trump presidency I thought that perhaps the MXN/JPY forex cross-rate might be a good guide to changed sentiment. (a cross-rate is the value of one currency against another with the US dollar removed).
Choosing the Mexican Peso is obvious because it is directly impacted by Trump's policies. The other side of the cross, the Japanese Yen, is equally obvious to forex traders because when risk aversion rises in global markets the Yen is one of the primary beneficiaries.
After USD/MXN made a high around 19.90 just before the first presidential debate the Mexican peso strengthened 7.4% against the US dollar driving USDMXN down to 18.45 last week. That move started to unwind when news broke that Donald Trump was resurging in battleground states like Florida and USDMXN is at 18.86 at present.
On the other side of the cross USD/JPY had been moving higher as the US dollar strengthened in recent weeks and until the email news broke USDJPY was trading above 105 from around 100.00 6 weeks ago.
The net result has been that for the past 4-6 weeks the MXNJPY cross-rate has been climbing. It has risen from 5.02 in late September to a high of 5.66 last week for a gain of 12.74%.
It's back at 5.55 this morning after the reversal of the peso last week and a big fall Friday after the email story broke. But it's recovering off Friday's lows as traders bet Trump is still only a slight chance of becoming president.
But one thing is clear to me.
If Friday's low of 5.4745 gives way there is every chance that markets across the globe will be sliding as well as traders take a little bit of risk off the table and buy some downside protection.
Have a great day's trading