FxWirePro: BRL, MXN and ZAR option markets priced in relatively amid lingering political turmoil

We expect price action to remain supportive for BRL with inflation at 20-year lows and positions seeming less heavy, despite a recent move higher in the currency over the past month. As such, we continue to favor BRL.

Additionally, we note that political news remains contained, and we continue to expect a benign outcome against the second accusation against President Temer.

We expect the lower house to reject the charge, as his first charge in August was rejected by 263, well above the 171 minimum votes required. We remain constructive BRL, but given our partial reduction to MXN shorts.

Ever since the two major upsets during the turbulent election risk year that was 2016, FX option markets have been on a hair trigger around the issue of political event risk premium, as evidenced by the pronounced day-weights attached to general elections in the UK in June, New Zealand in September and most prominently the French presidential vote in April/May 2017.

In keeping with this trend, the December 2017 ANC party congress in South Africa, Mexican State and the Presidential election in July 2018 and Brazilian general elections in October 2018 have all been visibly priced into ZAR, MXN and BRL vol curves respectively. The pronounced surface distortions created by these event weights have prompted questions about whether they could be overpriced, especially in the case of MXN and BRL where votes are 10-12 months away.