• Ashley Groves

3 Things - 12/20/19 - Tough Week For BRL, CNY And GBP

December 20 2019

Happy Friday!

As the festive period approaches and the out of offices are switched on, we wish you a Happy Holidays. After the rollercoaster of last week, it's safe to say that this week was expected to be quieter... enter Nancy Pelosi. 

Did You Know...

In the week that Donald Trump got elected as US President in November 2016, the google search "how to impeach a President" saw a 4,850% increase... 

3 Things That Happened This Week 


Despite Yearly Gains, Foreign Investors Cautious Of Brazil

Brazilian exchanges have seen huge gains in 2019 - the Sao Paulo “B3” is up 25% on the year, with record amounts being ploughed in by retail investors. However, with the BRL steadily declining against the USD, as foreign investors are fleeing, it is likely to end the year not far off record lows.

The Sao Paulo exchange remarked that foreign investor holdings have been reduced to $578m this month as unprotected remittances back to USD will have depreciated 10% or more in just the last year.

But Foreign Direct investment is holding steady over the last 4 years.

So while foreign investors may be fleeing the equities markets, long-term Foreign Direct Investments into alternatives such as Fundo de Investimento em Direitos Creditórios (FIDC’s) remain a popular choice.

BRL has fallen 10% on the year, currently sitting at 4.08 against the USD. With a daily vol of 0.8% in 2019, it has been one of the most volatile widely-traded currencies for the year.


Queen Speech Couldn't Prevent The End Of The BoJo Bounce

The Queen's Speech is a grand old affair and marked another royal, ‘Bring Your Kid To Work Day’. Although not many details are actually given it tends to set out the new government's priorities for the coming months and is seen as more of a ceremonial display than anything else.

So what are the Conservatives looking to achieve:

  • BREXIT - No extensions, the 31st January 2020. Trade negotiations are to begin... with the rest of the world.

  • The National Health Service (NHS) was at the center of the speech and is due to receive £34bn over the next five years.

  • Increasing the national living wage “provided economic conditions allow”

  • Strict no to the SNP's leader Nicola Sturgeon and her #indyref2

In addition to this, Britain is going to simplify how foreign funds can sell to UK investors post-Brexit.

GBP shot up to 1.35 after the Election last Thursday on the back of a majority government but has lost all those gains (2%) after Johnson pledged that there would be no extension to Brexit, renewing uncertainty with the deadline looming in January. A monthly vol of 2.4% for the year has to be some kind of record for Sterling.


China Capital Flight Devaluing Yuan

China is stepping up to the plate to stem the record amounts of money leaving the world's second-largest economy. It’s intriguing that the outflow is not attributed to offshore investments, but rather for fear of the continued trade tensions and a weakening economy.

However, there are legitimate questions that If money is moving offshore, but not into offshore investments, then where is it going? Well... That would be the $100B question.

The following figure shows the dramatic falloff in China to US foreign direct investment in the last two years (there’s a similar trend in China to EU investments). 

Likely reasons for this capital flight include local economic weakness, tariffs and trade wars, but a depreciating CNY may be a big contributor. This last is troublesome, as it’s a positive feedback loop - the more CNY leaving, the lower the CNY goes. And low it is going. In the last two years, the CNY has fallen more than 16% against the USD, from roughly 6 to the dollar to more than 7 to the dollar.

USDCNY has remained within a 6.7-7.2 band for the year, exhibiting a monthly vol of 1.1%. It is currently at 7.006


In Other News

This Weeks Economic Data Calendar

What To Watch For Next Week...

  • Dec 23rd - CAD GDP

  • Dec 24th - USD Durable Goods

5 Common Misconceptions CFOs Have When Discussing FX

Feature Article

We have been groomed for hundreds of years to think that the only way for us to manage transactions between two currencies is by using one of the behemoth banking institutions and that FX is far too complicated for the layman to handle. This article will look at some of the common misconceptions that every CFO should be aware of when dealing with FX within their firm... READ MORE

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Currency Heat Map

Below is the heat map for the first week in December, showing the relative volatility between currencies. The redder the color, the higher the volatility.

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