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Markets Mute to Trump T(I)rade

August 31, 2017 | News


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Unlike during the run up to the U.S. presidential election, President Donald Trump's recent threats against terminating the North American Free Trade Agreement (NAFTA) and shutting down the U.S. government if Congress doesn't pass funding for a border wall with Mexico have had minimal impact on the Mexican peso.

The markets have been unwinding the so-called Trump Trade for most of this year, with the Mexican peso back to where it was several months before Trump's election, Tom Clarke, co-portfolio manager on William Blair's Dynamic Allocation Strategies team, said in a recent Bloomberg Radio “Daybreak Europe” interview. “The market has become deadened” to these tweets and comments, Clarke told Bloomberg Radio, because the market has priced out the likelihood of the Trump administration implementing most of its proposed policy changes.

In the interview, Clarke went on to highlight how other geopolitical events are influencing currencies around the globe, including the euro, the pound, and emerging markets currencies.

Euro: Markets are wondering if the European Central Bank will try to weaken the euro, which has been strengthening for several months. “I think the consensus is generally right that [Mario] Draghi is unlikely to puncture the euro's buoyancy for some time to come,” Clarke said.

British Pound: British Prime Minister Theresa May had pledged to remove Britain from the jurisdiction of the European Court of Justice after it leaves the European Union (EU), but recently the government released watered down proposals that would allow some future EU judicial involvement.  Clarke made several key points when asked if this would have a negative impact on the pound:

  • He's not surprised that the United Kingdom is backtracking because when viewed in a game theoretical context, its bargaining power has been dramatically reduced since the recent U.K. election.
  • And the United Kingdom's ability to influence negotiations with the EU will continue to weaken as the Brexit deadline approaches.
  • But Clarke does not believe the recent events are bearish for the pound because the pound was already weakened significantly a year ago, which discounts a lot of negative news.
  • In fact, he is bullish on the pound.

“It's fundamentally cheap and very few developed world currencies are fundamentally attractive,” Clarke told Bloomberg Radio, which means it also provides diversification benefits in their portfolios compared to other currencies in the investment landscape.

Emerging Markets Currencies: Speaking of diversification, Clarke also highlighted that correlations between several emerging markets currencies and equities have reduced in the last few months. He noted that this is “a good thing” because higher correlations result in a narrower opportunity set and less opportunity for macro diversification. He mentioned the Philippine peso, Columbian peso, Mexican peso, and Turkish lira as providing macro diversification benefits in their currency strategy.

“None of these currencies are without risk, but they tend to be idiosyncratic risks, which mean they aren't cutting across the currency landscape and pushing prices around in the same direction,” Clarke said.

Listen to Tom Clarke's Bloomberg Radio “Daybreak Europe” interview