• Matheus Zani

🌎 China & US getting a Divorce? | ECB Rates Unwavering | BoJo Playing With Fire


September 11th, 2020


Happy Friday!


Wall Street hasn’t been known for its diversity; however, we have to tip our hat to Citigroup for hiring Jane Fraser, the first woman Chief Executive Officer of a major US bank. Citi is following in RBS’s steps, who appointed Alison Rose as CEO last year.



Did You Know...


At the end of 2019, just 31 women held the top spots at major American companies listed on the S&P 500 Index.


In 1809, Mary Kies, a Connecticut Native, was the first woman to receive …?



(Answer below)


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USD CNY


China Files for Divorce from the US



It’s been coming, sleeping in different beds and barely talking with each other. It seems like China is Covid-sick of the USA’s power over global finance. China may choose to develop their own technological standards, payments of international debts and trade, according to Robert Daly of the Wilson Center. The cost for both China and the rest of the world would be high, but China may be willing to do so if it means taking back control from the US. It’s not me it’s you...


After 40 years of ever deeper economic integration between the US and China, it is hard to imagine a serious severance. Many executives naively believe that politicians in Washington and Beijing will patch up their differences when they realise the true costs of “decoupling” the world’s two largest economies. But that's ignoring very real shifts in the political climate. When Donald Trump was informed that his order forcing US companies to cut ties with WeChat would hurt American sales in China, his response was: “whatever”.


China chafes at the US control over the financial world. The Dollar is the world's reserve currency and will remain so for the foreseeable future. Nasdaq is cracking down on initial public offerings (IPOs) of small Chinese companies by tightening restrictions and slowing down their approval. The US and EU have sanctioned many Chinese officials over Hong Kong and Xinjiang. The world abhors China’s aggressive actions in the South China sea. (9 dash line) and reneging on the 1997 Hong Kong transfer of sovereignty, and in response have eliminated Hong Kong’s special finance and trade status, reducing it to just another Chinese city.


Becoming more independent of the financial system and technology standards will help immunize China from further sanctions. In April, China released a new plan this year called “China Standards 2035” with the aim of influencing how the next-generation of technologies, from telecommunications to artificial intelligence, will work worldwide. While the US and EU are currently dominant, standards are not yet set in many tech areas, and this is China’s opportunity.


This super power competition is a marathon; and China often takes a long view.



FX

USDCNY volatility is surprisingly low given all the strife. But then again it’s not a freely-floating currency (yet another reason it will never be the reserve currency)



First Look


4 advantages of knowing the likelihood of a margin call occurring



Negative margin variation is not welcome in itself, especially when it comes totally out of the blue. But, unfortunately, all those hedging FX exposures have to live with them. That is why we have developed a statistical tool to estimate the likelihood of its occurrence.


Knowing beforehand the chances of having to make a future deposit, brings countless benefits and advantages for organizations. In this article, we look at how variation can impact companies and how the use of static collaborates to create a more solid risk management policy.


Read More Here


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EUR USD


The ECB interest rates and COVID-stimulus program unchanged


The interest rate on the ECB’s main refinancing operations, marginal lending facility and deposit facility remain at 0.00%, 0.25% and -0.50%, respectively. Pretty darned low!


“The incoming data since our last monetary policy meeting in July suggest a strong rebound in activity broadly in line with previous expectations,” Christine Lagarde, president of the ECB said. “Euro-area domestic demand has recorded a significant recovery from low levels,” she added, while warning that “elevated uncertainty about the economic outlook continues to weigh on consumer spending and business investment.”


The central bank revised up its “growth” forecast slightly for 2020. Gross domestic product is seen now dropping by 8% this year, from a June estimate of -8.7%. For 2021, the ECB expects GDP to grow by 5%. However, there was a surprisingly low inflation reading in August (the lowest since 2001), leaving us wondering whether the ECB will have to do more to stimulate the euro economy beyond low interest rates and the bank’s Pandemic Emergency Purchase Programme of 1.35 Trillion(!) EUR. But what that might be is a puzzle.



FX

EURUSD exhibits medium volatility (just under 7% annual) over a two year period, despite the 9% increase in the last five months. Hedging costs are about zero.


GBP USD


BoJo joins the treaty-bashing club


The UK government has confirmed its plans of a new legislation that could cause the collapse of final Brexit negotiations with the EU as if they negotiators needed another curveball.


The new law proposed by Boris Johnson has been widely criticized as a breach of international law and would straight violate the Brexit withdrawal agreement, which was ratified only in January and is related to trade between Great Britain and Northern Ireland.


The new law would allow British ministers to overrule on checking goods that are imported/exported from Northern Ireland to other parts of the UK, but this part of protocol had already been outlined and designed to prevent a hard border returning to Ireland after Brexit.


The protocol signed in October 2019 between the UK and EU was designed to ensure a division would not happen and that border checks would not be imposed even if there was no overarching Brexit deal. Therefore, this latest move prompted a backlash from within the party and among EU leaders.


Former PM Theresa May, said “How can the government reassure future international partners that the U.K. can be trusted to abide by the legal obligations of the agreements it signs?” Also, Tobias Ellwood, who is chair of the defense select committee in the British Conservative Party, added “How can we look at countries such as China in the eye and complain about them breaching international obligations over Hong Kong or indeed Russia with ballistic missile treaties or indeed Iran over the nuclear deal if we go down this road?”.


So far, the Brexit talks have plunged into a hazy and dangerous territory that might lead the UK to dismantle final Brexit negotiations with the European Union.


FX The pair GBP/USD shows high volatility with around 10% annually. The pair falls to multi-week lows amid increasing fears of a no-deal Brexit




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


A U.S. Patent


The Patent Act of 1790 opened the door for anyone, male or female, to protect his or her invention with a patent. However, in many states women could not legally own property; therefore, many women did not bother to patent their inventions.


Using her new method of weaving straw with sil, Kies made and sold beautiful women’s hats. First Lady Dolley Madison publicly thanked Kies for boosting the nation’s hat industry.



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