Protectionist U.S. trade policies and the cross-section of emerging market currency returns

This paper analyzes the impact of expected US protectionist trade policies on the cross-section of emerging market exchange rates, using intraday data from US presidential TV debates from 1996 to 2016 as exogenous shocks. Currencies depreciate when the protectionist candidate wins the debate, with stronger effects for countries with more exports to the US. We investigate the cross-sectional heterogeneity in exchange rate responses using a comprehensive set of macroeconomic fundamentals and policy instruments. Large and segmented financial markets, as well as limited bilateral financial ties to the United States, help reduce exposure to protectionist shocks. Suggestive evidence indicates that substantial foreign exchange (FX) reserves, FX interventions, and active capital account management can mitigate adverse exchange rate effects in response to protectionist shocks. There are no significant differences across geographic regions in the exposure to protectionist shocks.