Foreign Exchange Commentary – Mid Day Remarks
September 29, 2016
•
Oil Correlated Currencies Gain on OPEC Deal
Commentary
The U.S. Dollar
The currencies of oil-producing nations jumped Wednesday
after reports that the Organization of the Petroleum Exporting
Countries reached a deal to limit oil production in November.
The dollar was recently down 0.8% against the Canadian
dollar, 1% against the Norwegian krone and 1.3% against the
Russian ruble.
The dollar had been up against those
currencies earlier in the day. OPEC, which met Wednesday in
Algeria, agreed that a production cut is needed to lift oil prices
but will wait until November to complete a plan, according to
people familiar with the matter. U.S. crude prices rallied more
than 5% on the news, while commodity-linked currencies also
strengthened. The economies—and currencies—of oilexporting nations such as Canada and Russia have been hurt
by the rout in crude oil prices since 2014. Firmer oil prices
should help support their currencies, analysts say. Meanwhile,
the dollar was essentially flat against a basket of major peers
Wednesday after a string of speeches from Federal Reserve
officials.
In testimony to the House Financial Services
Committee, Federal Reserve Chairwoman Janet Yell said U.S.
interest-rate increases are on the way but said there is “no
fixed timetable” for tightening. Ms. Yellen cited solid job growth
and a steady unemployment rate as reasons to eventually
tighten policy. Meanwhile, Chicago Fed President Charles
Evans said in a speech that the U.S. could remain in a lowinterest rate environment “for some time.” Fed-fund futures,
which investors use to bet on the path of central-bank policy,
show a 53% chance that the Fed raises rates by the end of the
year, according to CME Group data. That is up from 48% on
Tuesday. “Fed expectations are unlikely to recover quickly in
the aftermath of last week’s dovish...meeting outcome,” wrote
analysts at BNP Paribas in a note to clients.
Mexican Peso: The Hot Proxy Bet for U.S.
Election
The Mexican peso is emerging as the investment world’s
favorite proxy for betting on the U.S. presidential race. The
currency began to surge during Monday night’s debate and
Summary
• Canadian dollar strengthens modestly
on firmer crude oil prices.
• Mexican peso continues to enjoy
additional strength – Goldman Sachs
sees Mexican peso appreciating 10% if
Clinton wins U.S. presidency.
• Euro-zone consumer confidence better
than forecast.
• Japanese yen softens from earlier
week levels to above 101 – Japan retail
sales decline 2.1% year-over-year,
lower than expectations.
• German
unemployment
rate
unchanged at 6.1%, unemployment
ticks up; German CPI in-line with
expectations.
• Federal Reserve’s Harker says slowly
moving to 2% inflation target.
• U.S. GDP final estimate of 2 quarter
GDP rises to 1.4% from 1.3% - U.S.
trade balance ‘improves’ to a deficit of
$58.4 bln version expectation of a
$62.2 bln shortfall.
nd
• U.S. 3 quarter GDP estimate raised to
3% from 2% at JP Morgan.
rd
• Euro-Zone economic and business
sentiment better than forecast.
• U.S. Congress rejects Obama veto of
Saudi September 11 bill.
• Federal Reserve’s Powell says he
reports a path of gradual interest rate
increases.
was up 2.5% by late Tuesday trading, its second-biggest daily gain this year. Pundits may still be
jousting over the election’s outcome, but a number of investors said the gains were driven by
perceptions of a strong debate performance by the Democratic nominee Hillary Clinton. Her GOP
rival, Donald Trump, has lambasted a key U.S. trade pact with Mexico and has pledged to crack
down on immigration. As Mr. Trump climbed in the polls this month, the peso plunged to a record
low near 20 to the dollar. Bets it would keep dropping reached a record $2.2 billion last week,
according to data from Scotiabank and the Commodity Futures Trading Commission that measures
investments by hedge funds and other money managers. ‘Donald Trump’s odds of winning the
election have a direct effect on the Mexican peso,’ said a strategist at Credit Suisse in New York.
The strategist has been betting against the peso since late July and thinks the currency will continue
to drift lower, in large part because he believes Mr. Trump’s policies would ‘bring massive amounts
of uncertainty to Mexico.’ Whether currency traders are on to something or have just found a set of
developments to speculate around is an open question. The GOP candidate’s rise isn’t the only
reason for the peso’s troubles this year: The Mexican economy contracted in the second quarter as
industrial production fell. And inflation is rising, which can be a headwind for a currency. Meanwhile,
the Federal Reserve has signaled that it is inclined to raise interest rates in December. Yet during a
year when low interest rates world-wide have sent investors chasing yield, many other emergingmarket currencies have rallied despite challenges of their own. Investors, for instance, have sent the
Brazilian real up 23% against the dollar this year even as that country struggles with its worst
recession in recent history. By contrast, the peso is down 11.2% since January, making it one of the
worst-performing emerging-market currencies. Many currency traders believe Mr. Trump’s stated
intention to renegotiate the North American Free Trade Agreement could damage the Mexican
economy. Nafta eliminated most tariffs and other trade barriers between the U.S., Canada and
Mexico, helping to boost sales of Mexican goods to the giant U.S. market. More than one-quarter of
Mexico’s gross domestic product comes from trade with the U.S., according to data from Societe
Generale while 81% of all its exports go the U.S., World Bank figures show. Mr. Trump’s plans to
reduce immigration also could weigh on the Mexican economy. Remittances from Mexicans in the
U.S. was the second-largest source of dollar inflows toward Mexico’s balance of payments,
accounting for 2.3% of its GDP last year, according to BMO Capital Markets and the World Bank.
Wall Street analysts have recommended other investments they say could perform well under the
next president. Those nervous about a Trump presidency have suggested haven plays such as the
Swiss franc and gold. Mr. Trump’s opposition to financial regulation and his support for a strong
military in theory could boost sectors such as finance and defense. Some analysts say a win by
Mrs. Clinton would likely benefit health care, since she has indicated plans to expand the number of
people covered by the Affordable Care Act. Jack Ablin, chief investment officer at BMO Private
Bank, wrote in a client note on Tuesday that gauging the election’s impact on equity markets is
challenging given the range of variables affecting stocks. The impact on the peso, however, has
been clear, he said. “We have found that Trump’s prospects have been moving in lock step with the
Mexican peso’s exchange rate versus the dollar,” he wrote. “Of all of the metrics we’ve tested, it’s
the one that has proven the closest barometer of election fortunes.” Traders appear to be braced
for more big swings. The implied volatility of the peso against the dollar, which is a gauge of how
much money investors are paying to insure themselves against or bet on large swings in the
currency, has spiked to its highest level since 2011, according to Thomson Reuters data. Prices
also show traders are betting volatility will come down after the election, according to RBC Capital
Markets. “The Mexican unit has become something of an oversimplified risk proxy for worries about
Trump,” Karl Schamotta, chief market strategist at Cambridge Global Payments, said in an email.
Comerica Foreign Exchange
-3551 Hamlin Rd., 2nd Floor
Auburn Hills, MI 48326
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Long Beach, CA 90802
1-800-318-9062
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Dallas, TX 75244
1-800-736-6734
J. Ballow  I. Bautista  T. Blonshine  C. Brower
D. Chiappetta  A. Cornejo  S. Fontana
H. Mackay  A. Gil  A. Holm  S. Margrif
D. Naum  B. Petrak  C. Ruben
R. Schohl  E. Sweiden  S. Vasal
Although the information contained in this report has been obtained from
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guaranteed or warranted and is subject to change without notice.
“In effect, the pros are trading ahead of punters who are expected to come into the market.” Axel
Merk, president of Merk Investments LLC, has been betting against the currency since the
beginning of September in some of his funds as a way to bet against risk. But he also sees Mr.
Trump’s policies, including promises to erect a wall along the Mexican border, as another reason to
stay short. “If you build a wall, maybe the peso will suffer,” he said.
Todd A. Blonshine
Senior Vice President - Western Division
Foreign Exchange Manager
Global Capital Markets
(800) 318-9062
Comerica Foreign Exchange
-3551 Hamlin Rd., 2nd Floor
Auburn Hills, MI 48326
1-800-746-6439
-301 E. Ocean Blvd., 18th Floor
Long Beach, CA 90802
1-800-318-9062
-4100 Spring Valley, Suite 422
Dallas, TX 75244
1-800-736-6734
J. Ballow  I. Bautista  T. Blonshine  C. Brower
D. Chiappetta  A. Cornejo  S. Fontana
H. Mackay  A. Gil  A. Holm  S. Margrif
D. Naum  B. Petrak  C. Ruben
R. Schohl  E. Sweiden  S. Vasal
Although the information contained in this report has been obtained from
sources believed to be reliable, its completeness or accuracy is not
guaranteed or warranted and is subject to change without notice.