巴黎银行-新兴市场-外汇策略-南非和印度大选：市场对外汇意味着什么？-20190419-10页_1mb

EM Strategy Summary: South Africa and India Elections Impact on FX

Core Content

This document provides an analysis of how the upcoming general elections in South Africa and India are influencing foreign exchange (FX) markets. It uses FX implied volatility distributions to infer market expectations and probabilities of currency movements based on election outcomes. The analysis is based on a special events model, which has been applied to previous elections in Brazil and Mexico.

Main Points

• Market Evaluation: Traders, economists, and central bankers assess market views, which are expressed through FX prices and implied volatility. Extracting market scenarios from these prices is complex.
• Special Events Model: The model uses FX volatility smile data (pre and post election) to calculate the implied probability of an event, such as election outcomes, affecting currency movements. It is based on the work of Clark and Amen.
• Binary Outcomes: The model treats elections as binary events, with the currency either appreciating or depreciating, and calculates the probabilities of each outcome.
• South Africa: The general election is scheduled for 8 May 2019. The market is pricing in a 63.9% probability of ZAR appreciation by 1.2% and a 36.1% probability of depreciation by 2.2%.
  • The forward jump PDF (probability density function) indicates that the market is currently pricing in a smaller premium for the election event.
  • The probability of appreciation has marginally decreased from 66.9% to 63.9% over the past month.
  • The analysis suggests that the market expects a reform agenda under President Ramaphosa, which may lead to a smoother path for economic recovery.
• India: The general election is ongoing, with the first phase starting on 11 April and the last phase ending on 19 May. The market is pricing in a 62.7% probability of INR appreciation by 1.4% and a 37.3% probability of depreciation by 2.4%.
  • The election premium for INR is higher than that for ZAR, reflecting the uncertainty surrounding the outcome.
  • The analysis suggests that the market is pricing in a 50% probability that Modi will remain Prime Minister, but his coalition may not secure an absolute majority, requiring support from other parties.
  • A 15% probability is assigned to the worst-case scenario where a "third front" government emerges.
  • Factors such as a more dovish central bank, higher oil prices, and retracement of long positions could influence the INR.

Key Information

• South Africa:

  • Election date: 8 May 2019
  • Implied appreciation: 1.2% with 63.9% probability
  • Implied depreciation: 2.2% with 36.1% probability
  • Market focus: Investors are looking for a reform agenda to address structural issues like high contingent liabilities and depressed investment appetite.
  • Recent strategy: BNPP has taken profits on a tactical long ZAR position, as USDZAR is near fair value and higher FX volatility could present new opportunities.

• India:

  • Election phases: 7 phases, ending on 19 May 2019
  • Implied appreciation: 1.4% with 62.7% probability
  • Implied depreciation: 2.4% with 37.3% probability
  • Base case: Modi remains Prime Minister with 50% probability
  • Worst-case scenario: 15% probability of a "third front" government
  • Strategy: BNPP prefers a short INR position against USD due to election premium, higher oil prices, and a more dovish central bank.

Summary Table

Conclusion

The document highlights the impact of elections on FX markets, particularly in South Africa and India. It uses a special events model to extract market expectations and probabilities of currency movements. For South Africa, the market is pricing in a higher likelihood of appreciation, while for India, the premium is higher due to the uncertainty around the election outcome. BNPP's strategy includes taking profits on ZAR and being short on INR, based on these implied probabilities and market conditions. The analysis is non-independent research and may involve conflicts of interest.