EMFX portfolio radar in Trump's triumph scenario

Is Trump’s victory pose the most EM currencies to suffer?

The following points are the extract of what could be the scenario of US election and their impact on currency markets based on what Donald Trump has said on the campaign trail, we can postulate five ways in which a Trump Presidency might differ from its predecessors.

1. More protectionist:

It is not just NAFTA that irks Donald Trump; he thinks America gets a bad deal out of many trade agreements. Countries most at risk would be ones with large trade surpluses with the US and a high ratio of US-destined exports to GDP.

2. More isolationist:

While measuring the value of trade with the US is relatively straightforward, measuring the value of the US military umbrella is far more difficult. It does seem likely that US isolationism would lead to more political uncertainty – and higher risk premia – in global hot-spots like Korea, South East Asia or eastern Europe. Higher political uncertainty has in the past been associated with weaker currencies and wider CDS spreads. Indeed, monetising news flow in EM FX could be used as a signal for when to go long USD vs EM currencies. By contrast, some regions could benefit from such a shift. Russia, for example, could gain from fewer US sanctions and could see increased Russian arms sales.

3. More uncertainty:

Above and beyond concerns about the specific policies that the President Trump might put in place, EM currencies could react to the uncertainty over these policies.

This, in turn, could provoke a general slide in EM currencies, and the worst hit are likely to be those with the highest beta.

4. Provoking a local reaction:

Although the three biggest impacts on EM currencies are likely to be expectations of protectionism, expectations of isolationism, and general policy uncertainty, investors will also reflect on how the change in the US might change local politics as well.

Authoritarian regimes might benefit from less US criticism of their policies. In the case of Russia, this might help asset values; however, in other countries, such as Turkey, this could increase political instability.

5. Tighter US monetary policy:

Trump has been more aggressive on boosting fiscal policy, and all else being equal, this could lead to a more hawkish monetary policy over the medium term, which could put pressure on more sensitive EM currencies.