As opinion polls move against him and given the headwinds he faces from State electoral maths, we put the odds of Donald Trump becoming the next President of the US at 25%. Concerns about what a Trump Presidency would mean for relations with Mexico.

For global trade more generally, have resulted in the Mexican peso dramatically underperforming EMFX peers since the end of January, so much so that current pricing looks overdone.

This is particularly true against other trade-sensitive currencies and even more so, if oil prices are either range-bound or set to crawl higher over time. AUD has gained 6% against the MXN since late January on the back of the global hunt for yield.

MXN has lagged EMFX rally on trump fears and is cheap vs AUD

AUD too would suffer in the event of a Trump Presidency, but has far less to gain than the MXN in the event that the opinion polls, for once, are accurate.

Where MXN currently looks cheap relative to the US dollar when we compare that pair to oil prices, AUDUSD looks expensive relative to interest rate developments.

Synthesizing Cross-Currency Trades:

Sell AUD/MXN spot at 13.88, 1-year target 12.5, this trade earns positive carry of 2.8% per annum, by no means the best carry trade in EM/DM FX but that does favour a straightforward spot trade. While staying short in USDMXN via ATM put options at spot ref: 18.3339, simultaneously, 1w debit put spreads for AUDUSD (0.7768/0.7508) at spot ref: 0.7621.

The short-dated AUD skew historically cheap, hence, we reckon AUDUSD upside in medium-longer run is to be limited; as we think the risk to AUD is still skewed towards downside in OTC as well (1m ATM IVs skews and RR are the live evidences for this).  

The timing is attractive to buy short-dated AUD puts tactically, with the downside skew currently ultra cheap. The AUDUSD 1m risk reversal is trading at -0.7, the lowest level since 2009.

The best implementation is therefore to buy an OTM short-dated put, which seems to be conducive that limits the premium and offers convexity and the appropriate vega exposure on the downside.