It would appear, believe it or not, that a good proxy for the US presidential election appears to come from Mexico. The Mexican peso has become the focus for traders betting on the election. Obviously, if Trump were to win, it could prove harmful for Mexico in many ways. The most notable problem for Mexico would be if Trump were to rework NAFTA.
We can see from the chart that since the middle of August, the Mexican peso has weakened from about 18 to almost 20 vs. the dollar (NYSEARCA:UUP). Remember, when the peso is rising in price it is weakening vs. the dollar and when the price is falling, it is strengthening. Look what happens to chart during the debate last.
The peso started strengthening during the time of the debate. If you want to get a front row seat into the mind of what the market is thinking about the election, just watch the peso. Clearly, the peso thinks Clinton won.
The S&P 500 (NYSEARCA:SPY) is up about 60 bps and is back to the 2160 level. At this point, and we are just back to where we were pre-FOMC meeting.
Look at that chart; when there is resistance on the way up, it becomes support on the way down, and we see this once again. The red trendline that the market was following and helping to keep the lid on things pre-FOMC is now acting as support. Where does the market go from here? Most likely, up.
We can see it's just hanging around this $47.75 level, a break above $48 sends it up even further. Discretionary - this is nothing more than it getting back to where it was pre-FOMC meeting level.
Yield & Currency
3-month USD LIBOR continues to trickle up and now sits right around 85 bps and 12-month USD LIBOR sits at 1.55%. I know many have argued this is simply because of New SEC Rules on Money Market coming into effect in 2 weeks' time. Yes, to me it makes perfect sense; let me go out and pay for 3-month eurodollar or LIBOR at two-year Treasury rates because I'm preparing for something in two weeks' time. Or better yet, I want to go out and pay for 12-month LIBOR or eurodollar at 10-year rates for the next two weeks. Why would any sensible investor want to pay to borrow for a short-term period at long-term rates? Maybe, it is because they have too, but then apparently, they didn't plan very well since the rule coming into effect has been known since 2014. So what else is at play here? There seems to be someone out there that just wants to borrow dollars and is willing to pay up for them. Why? Well, explain to me why 3-month LIBOR rates in pound, euro, yen, and franc have been declining? No demand? Right, no demand, because the demand has shifted to the USD LIBOR.
I still believe this has to do with investors not wanting to hold their respective local currencies and would rather have dollars, fearing devaluation vs. the dollar. We'll see what happens in approximately two weeks. However, if it is true and it is because of these new money market rules and everyone is positioning, then shouldn't we see rates go down then after? The rates should go down. I guess we'll see, but what do I know.
Markets will continue to digest the latest presidential debate, and we still have two more to get through. The best case scenario from a market perspective is that we can get a clear winner in these next two debates, so the market can begin pricing in the winner. For now, we will just have to continue to watch and see what the peso thinks.
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