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US Election: Why 'Tequila' Is the Way to Go

The U.S. dollar versus Mexican Peso trade offers the punchiest and most appropriate exposure to Tuesday's U.S. election, HSBC said on Friday, arguing that that this currency pair will be best placed to reflect a U.S.-driven shift in risk appetite.

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The British bank is adamant that "Mexico offers thrills" but cites the Turkish lira and Brazilian real as other contenders. However, these currencies lack appeal due to constraints from their local monetary policies, according to HSBC, which means they lose their affinity with the "risk-on risk-off" trade.

The Australian and New Zealand dollar are further suggestions but don't have the direct relation to the U.S. dollar that the peso offers.

"The (Canadian dollar) can lay claim on both fronts, but the currency has been less volatile than the (Mexican peso), suggesting that the reaction south, not north, of the border is the one that will deliver excitement," HSBC said. "Tequila is really the only way to go."

If Mitt Romney wins the election, HSBC predicts a rally in the dollar against the peso. The opposite would happen if Obama was re-elected, it said.

"If Mitt Romney wins the presidential race, the market would likely speculate that it will lead to a new chairman at the Fed," HSBC's global research team said in a note, urging clients to buy the dollar against the peso after a Romney win.

"In turn, this will raise fears that the perpetual QE (quantitative easing) program will be curtailed or cut short."

HSBC also fears that Romney's relationship with China could lead to a trade standoff after Romney declared he would label them as a "currency manipulator" if he entered the Oval Office.

"A win for President Obama would suggest business as usual at the Fed, and the markets would look for the QE program to be sustained and even beefed up if appropriate," HSBC said, encouraging people to sell dollars against the peso with an Obama victory.

"The resultant "risk on" mood would see (the dollar against the peso) head lower."

Detailing the different scenarios after the election, HSBC said that any signs that the U.S. had dealth with the "fiscal cliff" would trigger "risk on" trade and see the dollar heading lower against the peso at "a rapid pace".

This environment would bode well for Mexico's relatively strong macroeconomic fundamental picture, said HSBC, with the potential for new offshore oil discoveries and a growing auto manufacturing sector.

On the other hand, a negative outcome with regard to the "fiscal cliff" leaves the peso precariously exposed due to Mexico's reliance on exports to the United States.

"A worsening of the U.S. outlook could be the catalyst that sees crowded long (peso) positioning in both the (currency) and local bond markets unwound," it said.

"Here we have the view that this positive story no longer matters as investors head to the (dollar). This could see (dollar against the peso) move a lot higher into a major risk-off storm."

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