The Trump Trade: Profiting on the MXN, RUB and CHN

Where were you when the most watched Presidential Debate in U.S. history commenced? Was everyone anticipating a train wreck of cheap shots and name calling? Perhaps in a media world dominated by trash TV, our country prefers drama over policy. I’m not playing favorites, nor expressing my political preferences, but as a trader, the U.S. Presidential Debate on September 26, 2016 gave me something to remember.

Donald Trump, the brash and straight shooting Republican candidate with an appealing outsider perspective, called out the U.S. Federal Reserve Chair Janet Yellen during the debate. This immediately caught my attention. Transcribed, Trump said “we are in a big, fat, ugly bubble. And we better be awfully careful. We have a Fed that is doing political things. This Janet Yellen of the Fed. The Fed is doing political (things) by keeping interest rates at this level. Believe me, when they raise interest rates, you’re going to see some very bad things happen, because the Fed is not doing their job.”

As a mildly interested political observer, normally a statement like this wouldn’t phase me. But when professing trouble with monetary policy in a financial world (specifically Forex) littered with uncertainty about what may or may not happen, I was paying attention. A brief backstory, in August 2014, the U.S. Dollar (USD) went on an 8-month bullish rampage (See Fig 1 - DXY) from the 2008 historic lows. This red, white, and blue rocket was relentless as the EURUSD dropped from 1.40 to 1.05 (3,500 points), the GBPUSD dropped from 1.72 to 1.46 (3,600 points), USDJPY rallied from 102.00 to 125.00 (2,300 points). Basically, anything against the greenback (USD) was getting pummeled. It’s important to note that no monetary policy change had actually taken place, but rather the rumor of the U.S. nearing the point to normalize interest rates from the near zero levels after they were slashed from 1.00% to .25% in response to the 2008-2009 financial crisis.

Figure 1 - DXY Monthly Chart. Note the 2008 Lows, Wedge Formation leading to September 2014 breakout.

Figure 2 - DXY range from March 2015 to Present

Understanding this footnote is important because it certainly set the stage for one of the most aggressive monetary policy shifts ever in the financial markets. Central Banks worldwide have followed suit with this kitchen sink monetary policy ballooning balance sheets and lowering interest rates claiming it is the best source for stimulus and lending. Need further proof? See the Bank of Japan, European Central Bank, Swiss National Bank, Bank of England, Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Canada - the list goes on and on with participants racing to the bottom (near zero percent, some with negative rates).  

8 years later, it now feels like this is all they have to work with and if it goes awry, the aftermath could be catastrophic. Are we seeing a collective effort to protect and preserve a bubble to prove monetary policy works? Currently, the U.S. is the only central bank surrounded with the hype of raising interest rates. 2016 has been a rollercoaster year with lower volatility and paralyzing indecision as markets await more central bank rhetoric. The U.S. Federal Reserve’s decision to maintain the .25-.50% interest rate (unchanged in September 2016) still didn’t do much to stir movement as now the world looks towards a likely rate increase in December, mainly because the U.S. Fed is all but guaranteeing a rate increase. All of this has made trading very difficult and the best movements have been impulsive with a sporadic news push or recovery, but no clear direction has been sustained. This is either the most troubled market in the world with no clear breakouts, or this is exactly what the Central Banks want moving forward - and that is for markets to hang on their every word.

So, let’s circle back to Trump’s comment. Although I’m not a Trump enthusiast, it is quite refreshing to hear someone at that level, potentially our next U.S. President, note that there is trouble ahead if this is how monetary policy and the global central banks continue to behave. I agree with him, they are way too powerful, too political, and this monetary policy game is holding the financial markets hostage to prevent an unraveling from something they cooked up years ago.

Does this mean trading today is impossible? Absolutely not. The markets are still behaving, but spatially, traders that have fared best are those that are acknowledging the boundaries where price is rejecting, while firmly protecting the downside and securing profits when available. It also means that these markets will not stay locked up forever and another breakout is likely to occur. It is simply a matter of surviving in the interim and staying alert on the notable levels confirming breakouts.

Donald Trump’s stirring words may have institutions and traders taking a second look at the USD. If the U.S. Fed proceeds to raise rates in December, it will likely be inundated with cautious rhetoric, dot plots, global growth headwinds, and a fragile economic landscape. In other words, we’ll do it because we said we would, but we’re extremely careful and cautious moving forward.

If the cautious tone continues, the greenback may take a backseat to yielding currencies where investors would prefer actual yield over speculation. This was also evident through most of 2014 in Forex with extremely low levels of volatility favoring currencies like the Australian Dollar (AUD), New Zealand Dollar (NZD), and Canadian Dollar (CAD).

Trump has an interesting agenda with Mexico, Russia, and China. All of which offer potential with currency trades, the USDMXN, USDRUB, and USDCNH respectively. This so-called Trump Trade can be taken advantage of by studying the behaviors of such crosses. Personally, I have traded the USDMXN and the USDRUB. NOTE: Please make sure before thinking about trading or taking any trades, you understand the risk associated with trading.

The USDMXN is one of my favorite currency pairs because of its technical behavior. Traders with a reasonable eye for support, resistance, trendlines, and price action will see its patterns and predictability.

Furthermore, what makes the USDMXN more appealing is the fact that it offers a significant yield opportunity against the USD. Current rates favor MXN (4.25%) vs. USD (.25-.50%). Holding a USDMXN SELL will offer positive rollover or positive interest, but obviously you want the trade to move in the proper direction as well. Considered an exotic pair, the USDMXN is not a trade that you want to fight. So look for the structural alignments and clean setups, and it becomes very tradable. I would love to see a topping formation on the USDMXN for a massive carry trade opportunity (See Figure 3). It definitely requires some confirmation and a bearish breakdown on the U.S. Dollar Index (DXY), but if we see the alignments, the profit potential is amazing.

Figure 3 - USDMXN illustrates the USD rally and potential bearish formation

The Russian Ruble has a slightly different, more volatile story. The USDRUB is heavily correlated with USOIL and several extreme circumstances have hit the pair since August 2014 (See Figure 4). When the USD rally began in mid-August 2014, the USDRUB created as vertical of a move as you can get in the financial markets. Perhaps it was the perfect storm of USD strength and plummeting OIL/commodity prices that led to such an extreme. So much so that it required Bank of Russia intervention. The Bank of Russia increased the lending rate to a whopping 18% to incentivize institutional buying and balancing. As OIL continued to make a dip lower, the USDRUB, despite the appealing yield, still made new highs - Figure 5 illustrates this relationship. Since the 18% rate, the Bank of Russia has slowly been cutting rates, currently sitting at a 10% yield.

Figure 4 - USDRUB - The perfect storm involving USD and OIL

Figure 5 - USDRUB compared to USOIL

Again, quite an appealing rate against the greenback, but with heavy ties to OIL, it has bigger macroeconomic themes to consider if trading. Not all brokers offer the USDRUB exchange due to low liquidity and inability to fill all levels, but if the USD continues to stagnate, and OIL/commodity prices recover in light of a sideways greenback, the RUB may continue to see the love, much like its inverted twin, USOIL.

Lastly, the wild card, or the USDCNH. The Chinese Yuan is regarded as the most heavily manipulated currency in the world, or at least that’s what everyone is being told. The truth is central banking is currency manipulation. Whether it is to stabilize or to prevent catastrophe, they are all playing the same game to some degree. The USDCNH produced some highlights in August 2015 (See Figure 6) when China intentionally devalued the Yuan overnight. This also transpired while the government was freezing Asian exchanges to prevent bearish hemorrhaging as the markets were showing massive instability at that time.

This is another instrument where traders need to understand what they are doing. The margin requirement is extremely high with certain brokers and the volatility is quite low. If one were trading according to value and volatility, the USDCNH is not the greatest instrument. But, like the others, offers a positive yield against the USD. Currently, the CNH sits at a 4.35% lending rate against the .25-.50% USD. If we see a significant slide in the USD, the CNH will likely reflect this movement, just be wary of the dreaded intervention, so protect those profits.

Figure 6 - USDCNH and China’s August 2015 shocking move

How can Donald Trump help traders? Maybe his presence in the White House will evoke enough uncertainty and speculation that 2016’s volatility gauge will change from NO GO to GO ZONE. Traders prepared for these breakouts can hopefully see some reasonable trends pushing through Q4 and into 2017 with a new U.S. President. Maybe the USDMXN will vamanos with the building of a wall, or a renegotiated trade deal with Russia and China will bring liquidity and carry back into the markets. Whatever fireworks are ahead, the Trump Trade may be an early holiday gift for traders who have been patiently waiting for some sustained activity in 2016. We’ll see what happens so prepare and trade accordingly.

Disclosure: I have no positions pending on USDMXN, USDRUB, or USDCNH nor does any information in this article constitute as trade advice. Please read all risk disclaimers and carefully consider your decisions in trading.