20180606-法国巴黎银行-AMLO_no_longer_a_risk_for_MXN__slightly_fatter_tails_for_BRL_10页_1mb

Summary of EM/QUANT STRATEGY Report

Core Content

This report, produced by Banco BNP Paribas Brasil S.A., analyzes the market implications of the upcoming presidential elections in Mexico and Brazil, focusing on the FX (foreign exchange) market and the probability of currency movements based on volatility smile data. The analysis uses a model that assumes the election probability density function (PDF) as a mixture of two lognormal distributions — one for appreciation and one for depreciation — to calculate implied probabilities.

Mexico

• Election Risk Embedded: The FX option market for MXN indicates that the election risk has already been fully embedded in current prices.
• Equal Probability of Movement: The model suggests that the chances of MXN appreciating or depreciating due to the election are almost equal, indicating that the market no longer expects a significant move from the election results.
• Front Loading of Risk: Market participants seem to have front-loaded the electoral risk, with a focus on NAFTA negotiations. This has led to little premium being priced in for the election outcome.
• Key Data Points:
  • On 1 July 2018, the market implies a ~50% probability of a 3% MXN movement (either appreciation or depreciation).
  • The probability density function (PDF) shows that the market is pricing in a symmetrical distribution for both appreciation and depreciation.
  • AMLO's double-digit lead over other candidates reinforces the market's belief that a substantial move is unlikely.

Brazil

• Two-Round Elections: Brazil's elections are scheduled for two rounds, on 7 and 28 October 2018. The premium is spread over these two dates.
• Fatter Tails for Depreciation: The current probability density function (PDF) suggests a fatter tail for depreciation compared to the last update, indicating increased uncertainty.
• Implied Probability:
  • ~84% chance of BRL appreciation (~1.5%).
  • ~16% chance of BRL depreciation (~8%).
• Market Expectation:
  • The market is pricing in a low probability of substantial BRL depreciation the day after the second round.
  • The forward jump PDF indicates a reduced forward variance excess, suggesting less concern about the identity of the candidates.
• Historical Context:
  • The analysis extends back to June 2017, showing that the probability of BRL depreciation has remained low, but with increased variance in the tails.
  • The market expectation for BRL appreciation has remained relatively consistent over time.

Key Information

• Methodology: Uses FX volatility smile data to infer the implied probability of election outcomes.
• Data Sources: Bloomberg LLP and BNP Paribas.
• Assumptions: Election outcomes are modeled as a binary event with two lognormal distributions.
• Focus: The report provides insights into market expectations for currency movements, particularly in the context of political uncertainty.
• Implications:
  • For Mexico, the market is not pricing in a significant move post-election.
  • For Brazil, there is a slightly higher risk of depreciation, but still low in probability.

Important Notes

• This document is a marketing communication and not investment research.
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