The big election focus this weekend will be on Sunday, with the latest polling data showing right-wing Senator Flávio Bolsonaro and socialist President Luiz Inácio Lula da Silva are statistically tied. Polymarket, meanwhile, shows Bolsonaro with a wide lead.
Bloomberg reports that neither Bolsonaro nor Lula is expected to secure an outright victory in Sunday's first round of voting. This suggests that a second round on October 25 is highly possible.
For weeks, we've outlined that high volatility is expected in the Brazilian currency and stocks after this weekend's first round of voting.
Traders are increasingly positioning for former President Jair Bolsonaro's eldest son to beat the socialist. As we've pointed out, this could set up the next big squeeze.
So far, the election trade in Brazil is gathering steam: currency volatility is surging, bullish stock options have erupted, and Polymarket odds give Bolsonaro roughly a 55.6% chance of winning.
The Brazilian real's one-week implied volatility has jumped above 31%, its highest level since late 2022. That exceeds the one-month measure, which captures both voting rounds but remains below 25%, highlighting the extreme concentration of risk ahead of Sunday.
Open interest in options on the iShares MSCI Brazil ETF (EWZ) has hit a record of 9 million contracts, driven mostly by calls. Demand for bullish options on the main equity benchmark Ibovespa index has also increased since late August.
Citigroup and JPMorgan analysts have told clients to use options that would benefit from a stronger real, while Brazilian hedge funds, including Ibiuna and Verde, have told clients they have positioned themselves with options for a potential stock rally.
"We expect the biggest surprise to come in the first round, with Flávio likely to finish ahead of Lula," Fabricio Taschetto, CIO at Ace Capital, wrote in a note. He added that the market reaction could exceed the move already priced into options.
BofA analyst David Beker told clients, "Brazil outperformed LatAm and global markets this week. Focus is on the first round of elections on Sunday."
