Why Mexican peso and the Japanese Yan declined sharply after first US presidential debate?
The global investment market has been keeping close tabs on the effect of the first presidential debates between Hillary Clinton and Donald Trump back at the end of September 2016. The reason is explained with extremely polarized political views of the Democratic candidate Clinton and Republican candidate Trump, with the former seen as a known player whose policies will be largely a continuation of Obama's administration, and the latter seen as extreme advocate of protectionism policies that could lead to political and economic risks (Holodny, 2016). Given that there was no absolute confidence about the outcomes of the debate, stock markets experienced certain fluctuation prior to the debate. However, shortly after debate financial markets reported that the Japanese Yen declined, and the Mexican peso rebounded before declining as well.
Market analysts explained this shift with the lengthened odds of Trump winning the debate, as well as the lack of common opinion on the favorability of the electorate after the debate was finished. Thus, the currency rates have started to shift against the U.S. dollar depending on the expected risks that could emerge as a result of Trump's view of the economic relationships with other countries. For the case of Mexico, the protectionist platform declared by Trump was primarily considered as a threat to the country's economy associated with revising the conditions of the North American Free Trade Agreement (NAFTA) and taking strong actions to deport millions of illegal Mexican immigrants, including the construction of the border wall for the cost of Mexico (The Econimist, 2017). The economic consequence of such step was seen by the analysts as the currency devaluation, as well as potential stumbling into recession and raised interest rates for the central bank loans. As an emerging country, Mexico significantly depends from the trade partnership with the United States, while the debate results suggested that it could fall a victim of trade barriers or renouncing of NAFTA which could be done on a six month notice. Along with the risk of Trump's threat to block remittances from immigrants in the United States, this would also have significant costs for Mexican economy given high dependence over immigrant labor for the low-income population in Mexico (The Economist, 2017). Overall, it suggests that Mexican peso will devaluate, leading to the unfavorable investment decisions.
The political aspect of the case with Japanese Yen has emerged since Trump has first aggressively voiced his concerns against the Treaty of Mutual Cooperation and Security signed between the United States and Japan in 1960. Arguing that the Japanese nation constitutionally could not send forces to support the United States, while the United States is bound to do so, Trump has mentioned that there is a need to walk away from this treaty, also listing other nations protected by the U.S. military personnel stationed at their territories (Henderson, 2016). With an expected threat of breaching economic agreements as a result, it was also forecasted that the Yen would likely to go into a deep decline as a result of tight fiscal policies implemented by Trump administration (Holodny, 2017). In the meanwhile, it is noteworthy that the Yen's gain, and risk asset declines, reversed as Clinton see gaining upper hand in the course of the debate itself.
The common case for two currencies is seen from the impact which an external politics can have over the individual economy of an emerging country, and the global economy where the developed country plays important role. For both cases, it was the protectionism platform that was threatened by Trump as a solution to improve economic stance of the United States. Considering high dependence of other currencies from the U.S. dollar globally, this political view was certainly evaluated with financial investment risks, leading to the currency declines.
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