Trading Fixed Income and FX in Emerging Markets by Dirk Willer & Ram Bala Chandran & Kenneth Lam

Author:Dirk Willer & Ram Bala Chandran & Kenneth Lam [Willer, Dirk & Chandran, Ram Bala & Lam, Kenneth]
Language: eng
Format: epub
ISBN: 9781119599050
Publisher: Wiley
Published: 2020-10-05T00:00:00+00:00

FIGURE 5.8 Wait, When Did Chavez Come to Power Again?

Note: Spread difference Venezuela over Brazil.

Source: Bloomberg.

The underlying reason for this pattern is that the incentives for an incoming president, who is seen sceptically by markets, to sound market friendly are very high. After all, the main alternative is to have to deal with an immediate collapse of FX markets, which will generate inflation and a negative growth impact. Most market‐unfriendly administrations therefore decide that it is better to boil the frog slowly, rather than to pour boiling water on the market. Therefore, we strongly believe that the typical relief rally post‐election has not been just a case of luck, but a strong underlying psychological pattern that shapes how asset markets behave around elections. Thank God for the FX vigilantes! We also note that most recently, the pattern has continued. For example, the election of AMLO in Mexico in July 2018 resulted in a relief rally post‐election even though he was clearly a market‐unfriendly candidate, who did not have much interest in placating markets. In spite of that, the usual rally happened (see the following box).

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