Cutting through election data

There's an election soon in early November, which might have been mentioned at least a couple of times, which everyone is talking about. The elections in Nicaragua. Ok, perhaps not quite that one, but at least it's roughly on the right side of the world. The US presidential election is always a key event in the calendar of financial markets. As I mentioned a couple of weeks ago, the challenge for traders is to try to divorce their own political preferences from how they trade such events. After all, the goal is to predict who will win, not who you want to win.

One of the most obvious ways to try to try to forecast is to first understand market expectations. One way to do this is to look at market moves in reaction to polls and the recent debate. At least from an FX perspective the consensus is that Biden would be bearish for the dollar, whilst Trump would be bullish. Whoever wins, markets will probably conjure up a reason to buy equities! 

It's also possible to look at vol markets for options contracts that cover the November election date. The higher the vol in these contracts then the more risks the market sees in the election and ING wrote a nice note about this looking at USD/JPY vols. It's also worth trying to back out the implied distribution of prices from vol markets, to understand the distribution of outcomes, and this is something Iain Clark and I did for USD/MXN before the 2016 election....

To read the rest of the article on the Cuemacro website, please click here!