How to Build a Synthetic Cross Pair to Trade
|With the US Presidential election coming up, a unique trade has developed called a synthetic cross pair with the Mexican Peso and the Russian Ruble. A synthetic cross pair is a trade between 2 currencies of which neither one of the currencies is referencing the US dollar. They do not directly trade against each other. This strategy is based off of one currency weakening against the US Dollar while at the same time another currency strengthens. The synthetic cross pair that has been gaining in popularity over the last few weeks has been dubbed the “Trump Trade”.
This synthetic cross pair is created when you buy a USDMXN and sell a USDRUB. In this trade, the Mexican Peso would weaken against the US Dollar while the Russian Ruble would strengthen against the US Dollar. This strategy can be utilized off of a macro/geo political event or a potential change in monetary policy. In this case, it is a geo political event. The two currencies involved should have an inverse relationship to each other against the US dollar, boosting the return of the trade. This type of trade should not be looked at as any sort of hedge.
Their has been a direct correlation to a weakening of the Mexican Peso against the US Dollar as Presidential polling numbers show the Republican candidate, Donald Trump closing the lead against Democratic candidate, Hillary Clinton. With Trump’s rhetoric about building a wall on the Mexican border and altering NAFTA, Mexico’s economy would suffer sending the price of the Peso lower against the US dollar. In the last few weeks, as Trump’s polling numbers continue to climb, we saw the Mexican Peso hit an all-time low against the US Dollar the other week. However, with polls suggesting that Trump lost the first debate this past Monday, the Peso strengthened but is still down 6% for the month.
We can say the opposite for the Russian Ruble as that currency has strengthened as Trump makes Pro Russian statements, talks about a potential shift in NATO and would likely build a strong relationship with the Russian President Vladimir Putin. If Trump were President, sanctions against Russia by the US would be lifted strengthening Russia’s economy. This new US-Russian relationship would strengthen the Ruble against the US Dollar. Similar to Mexico, as recent polls showed Trump narrowing Clinton’s lead, the Ruble gained in strength. And as reiterated earlier, with polls suggesting that Trump lost the debate, the Ruble weakened as a vote for Clinton is a vote for the staus quo. Clinton and Putin are also not the biggest fans of eachother.
With the information given above, to now create this synthetic cross pair would include 2 trades. One downside to the potential boost in return is that you will have to pay more in bid offers since you are paying for both trades.
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