• Matthew Fotheringham

🌎 Cayman Looking for Forgiveness | Africa Dry on FDI | UK Recession Nightmare


August 14th, 2020


Happy Friday!


If you’re excited about the weekend why don't you pop open a bottle of bubbly and do the French economy a favor? Despite perfect conditions in France and an early harvest, there has, quite understandably, been a massive decline in those celebratory occasions. If you needed an excuse, its national financial awareness day in the U.S., what could mark the occasion better than popping open a bottle bubbly?


Did You Know...


The champagne region follows a "single-yield" rule. This means all growers, or vignerons, agree to sell only a fixed amount of grapes per hectare. Any surplus is left to rot in the field or is turned into a refrigerated "reserve" for use in case of poor future harvests.


Can you name the country that imports the most champagne?


(Answer below)


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EUR USD


Cayman Attempt to Get on the EU's Nice List



Back in February 2020, we mentioned how the European Union added the Cayman Islands to its tax haven blacklist. Where it joined fellow paradises Fiji and Vanuatu along with the less tropical but equally sandy Oman, on the list of those territories failing to crack down on tax abuse. Other notable entries this year were Panama, Palau and Seychelles, all of which sound like lovely holiday destinations (remember when we could go to these places… neither do we).


Cayman has not taken this lying down, being one of the offshore destinations of choice for many of the world's investment funds, they have been busy trying to rectify this. I guess we have all had our lockdown hobbies.


In an attempt to get itself removed from the EU’s naughty list, the Cayman Islands have retooled their Private Funds Law 2020 in hopes that in October - when a further review of the jurisdiction gets conducted by finance ministers - they will get the seal of approval.


The alterations are an attempt to address where the previous law fell short and expands the scope of private funds requirements to register in Cayman.


One result is that more funds will need to register. Those now include vehicles holding single assets, such as co-investments, as well as alternative investment vehicles established in Cayman, and certain Master fund structures.


Fund Managers are quaking at the idea of having to register more entities, but it is generally accepted that the new scope of registration is still far less onerous than if they were working with the FCA or SEC.


Some of the initial requirements will include private funds needing to appoint a locally approved auditor in Cayman and will need to have in place coherent valuation policies.


If you would like to read more on this please check out Private Funds CFO.


Cayman’s currency, KYD, is pegged; however, most Fund transactions here will have one leg in USD.


EURUSD is one of the less-volatile currency pairs, at less than 7%/yr. Hedging costs are reasonable, at less than 1%, favoring selling EUR. EUR has been steadily gaining back the ground it lost against the USD back in April. This can be attributed more to USD weakness than EUR strength though.




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Often, investment portfolios are exposed to multiple currencies. For those that choose to hedge all or part of this exposure, determining the optimal hedge strategy is a difficult task. Each exposure has different individual characteristics: notional size, volatility, and cost of hedging.


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ZAR XAU KES


Investment Drought Could See Sub-Sahara Go Thirsty



It’s estimated that Foreign Direct Investment (FDI) into SSA (Sub-Saharan Africa) will fall by 30% in 2020. How much will depend on how diverse the specific country economy is, however, the outlook seems pretty dismal across the continent.


Single commodity economies like Nigeria (Oil and gas) and Zambia (copper) will suffer more, while more diverse economies which include both commodities, as well as farming and fishing, will see a more limited impact. Diverse economy countries include South Africa, Kenya and Ghana. One exception to this are the gold producers (SA, Senegal, Mali) who will benefit from gold’s recent rise due to its safe-haven status.



Gold is off its recent highs but still up nearly $400/oz in 2020.



SSA countries aren't helping their cause, with some of the worst regulatory barriers and ease of doing business rankings. For example, the cost to obtain a permanent electrical connection in SSA is 3X higher than the global average, and 52(!) times higher than OECD countries. Rankings in trading across borders and registering property are equally dismal. That, in addition to future market trend uncertainties, will limit FDI.


The more nuanced story is that in some countries, factors may balance out. For example, in Kenya, tourism FDI will be lower but is offset by banking and telecoms (which are strong throughout the region).


It’s estimated that normal FDI flows will not return to normal levels until 2021-2022.


The contrasts are huge. ZAR is hugely volatile at over 15%/yr, and its hedging costs are equally stunning, between 3-4%, favoring selling USD. On the other hand, KES does not exhibit hardly any volatility at all, and its hedging costs are nearly zero.



GBP


I Misplaced My Economy, Could You Help Me Find It




UK economic output shrank by 20.4% in Q2 2020, the worst quarterly fall since quarterly records began in 1955, pushing the country into the deepest recession of any major global economy.



Has anyone seen an economy around here?



Not alone, but doing much worse.


Compared with the end of 2019, UK economic output fell by a cumulative 22.1% in the first six months of 2020, a worse outcome than Germany, France and Italy, and double the 10.6% fall recorded in the United States, the Office for National Statistics said. Industries most exposed to government lockdown measures - services, production and construction - saw the worst drops.


Unfortunately, it will likely get worse before getting better. The UK government has - so far - failed to replicate most of the trade deals between the EU and third countries, leaving British exporters out of luck at the end of 2020. "The dual threats of a second wave and slow progress over Brexit negotiations are also particularly concerning," Alpesh Paleja, lead economist at the CBI, said in a statement.


Sterling’s volatility is quite high, nearly 10%/annum, corresponding to a VaR(95%) of 16%. Hedging costs are mercifully low, in fact nearly zero. Despite the dismal GDP results, the ccy pair remained relatively stable against its peers; solidifying its break above the psychological barrier of 1.30.



In Other News



Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.




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Quiz of the week


Answers


It's the United Kingdom… Last year they imported almost 27,000,000 bottles of the stuff, closely followed by the US with 25,500,000, and then a large drop off to Japan who imported only 13,000,000. If you normalize those numbers vs population, the UK wins even bigger, at .4 bottles per person per year, Japan at a distant 2nd (.1 bottles per person per year), and the US at a pathetic .07 bottles per person per year. Clearly the US needs to celebrate a lot more.


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