Mexican Assets Pivoting on U.S. Presidential Campaign Results

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Mexican Assets Pivoting on U.S. Presidential Campaign Results

In the lead-up to the U.S. Presidential election, the impact of U.S. trade agreements with its North American neighbors has become a central point of contention between the candidates. Each party platform has a distinct strategy for handling trade relations, and the differences between those plans could have significant consequences -- in either direction -- for business in Mexico that are trying to maintain access to the U.S. market.

Given its prominence in the campaign discussions, and the country's economic ties to the U.S., the Mexican currency and Mexican stocks have been pushed around by the twists and turns of the U.S. election polling. Obviously, the American people are the most impacted by the outcome of this election. Mexico's economy might be a close second, though, and that fact has led to increased volatility for Mexican assets.

Ahead of this week's widely anticipated debate between Donald Trump and Hillary Clinton, the Mexican Peso fell to a low against the dollar. This came amid Trump's steady gain in the polls over the last few weeks, which saw the Republican nominee narrow his polling deficit to nearly a dead head as the first debate got underway. Trump's policies could impose significant roadblocks for Mexican companies selling into the U.S., and the shift in market conditions echoes that.

Following the debate however, which many media pundits called in favor of Clinton, the peso immediately rebounded.

Similarly, the iShares MSCI Mexico Capped ETF made gains following the debate This ETF tracks a basket of Mexican equities. Major components include telecommunications firm América Móvil , beverage and retail company FEMSA and the media company Grupo Televisa .

The implied volatility for EWW has itself been volatile over the past year. It's been a long election season, for the candidates, for the electorate, and for Mexican companies, who might be at the mercy of an election in another country.

While the past year has seen swings in EWW's implied volatility , the measure has been rising for most of the past several weeks. It hit a multi-month low in early August at 17.4, just after the conventions, when Trump's poll numbers were at their low. However, implied volatility bounced back as the poll trend reversed, and reached 27.3 about a week ago, as Trump's poll numbers came up to about even with Clinton's. This was the highest mark since June.

There has been a slight dip lately, but levels remain near multi-month highs.

The ATM Straddle premium for EWW is relatively constrained, but it is an ETF and less susceptible to sharp near-term moves than individual stocks. At the time of this post, the straddle premium for the October 7 expiration is $1.59, or 3.3%. It's $3.28 (6.7%) for the November 4 expiration -- just before the November 8 election. The November 18 expiration (just after the U.S. election), has a $4.10 straddle premium, or 8.4%.
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