Mexican Currency Traders Are More Worried About Amlo Than Trump

  • Options show spike in volatility expected around election time
  • Bloomberg poll tracker shows Lopez Obrador as frontrunner

Investors in Mexico’s currency are pricing in more tumult around this year’s presidential election than they anticipated before the 2016 U.S. vote that put Donald Trump in the White House.

The difference in price between short-term options and those that cover the period around the July 1 election is near a record high as investors pay up to protect themselves against volatility. The spread’s four-week moving average is now twice the level it was three months before the U.S. ballot.

The top contender in Mexico’s vote is Andres Manuel Lopez Obrador, a left-leaning firebrand who some investors are concerned will seek to roll back efforts to open the economy, particularly the energy industry. While traders were equally worried about the potential effect of Trump’s pledges to slash imports from Mexico, his candidacy was viewed as somewhat of a long shot, reducing the demand for protection in the options market.

Spread Surging

USD/MXN vol spread between 6- and 3-month stays high in 2018

Source: Bloomberg

Note: Chart shows 4-week moving average of vol spread over past six years

“As it stands, it looks like Amlo is going to win,” said Christian Lawrence, a New York-based strategist at Rabobank, which predicts the peso will fall about 10 percent by the end of the second quarter to 20.67 per dollar. “International markets don’t welcome populist leaders unless that leader tends to be pro-business.”

Lopez Obrador, better known as Amlo, has about 42 percent support in Bloomberg’s poll tracker. That’s a significant lead over second-place candidate Ricardo Anaya, someone broadly considered friendlier to business, who has 27 percent.

The peso has strengthened 5.7 percent this year as the central bank has continued on a path of raising interest rates, making it the best performer among developing-nation currencies. But markets see rough seas ahead. Six-month forward contracts project the peso falling nearly 3 percent, while one-year forwards show the currency falling 5.7 percent.

    Quotes from this Article
    Before it's here, it's on the Bloomberg Terminal.