D-Day for Brexit, Christmas in Oz and Argentina's Debt Battle - 3 Things - 1/31/2020
January 31st, 2020
This week the world was shocked by the horrific helicopter crash that claimed basketball legend Kobe Bryant and 8 people, including his 13-year-old daughter, her friend, her parents, and four others. We, as well as countless others, have been inspired by Kobe’s “Mamba Mentality” and his death sent shockwaves through the world.
Kobe’s furious work ethic, minute attention to detail and ability to constantly evolve allowed him to become one of the greatest sportsmen in history. Hopefully, we can all take away something from his lessons and continue his teachings. Let’s be honest he wouldn’t want us moping around.
Did You Know...
The longest drug-smuggling tunnel ever was found at the southern border of the US this week at 4,309ft long (1313.4m).
That got us thinking - what are the three longest tunnels in the world?
(answers at the bottom)
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Almost four years after deciding to, Britain will exit the EU today at 22.00 GMT.
So what now, it feels a little like that Netflix series that your partner is watching is finally ending and finding out there isn’t another season…
Now the UK will enter the "transition period", which will be to secure the trade and customs agreements, with the EU and other countries. According to Boris Johnson, this period will not be prolonged past the end of 2020, but then again the UK was meant to leave on the 31st of October “no ifs, no buts” - so we would take this with a pinch of salt.
The pound has struggled over the past 4 years and Bank of England Governor, Mark Carney recently said "Sterling volatility, as you would know, is at emerging market levels and has been decoupled from other advanced economy pairs for obvious reasons"
It will be interesting to see where Sterling goes in the future and we wonder if we will ever see a return to the GBPUSD 1.7331 as in 2000!
The pound remains more than 10% down on its level before the Brexit vote against both EUR and USD (although up from the lowest levels last August.) Monthly volatility remains elevated, 2.9% for GBPUSD.
Clocks ticking on Argentina's Debt Crisis
Argentina’s new President, Alberto Fernandez, has found himself in a race to complete negotiations to restructure $100bn in debt payments with creditors, the twist is they only have two months before falling into default.
Despite the fact that this sounds like a dramatic movie script, this could have ramifications with the current gross government debt sitting at 93% of GDP, the highest since the 2004 restructuring.
The legislation to make public debt restructuring a priority passed the house on Wednesday and will go to the senate - conversations will continue with the likes of the IMF who transferred $44bn in a 2018 credit agreement.
Buenos Aires could be the first province to fall into default. They have until 1 pm local time today to agree on a proposal delaying a principal payment of $250m until May 1st. Failure to do so leaves the province days away from technical default.
If negotiations go to plan, a timeline has been set for the next two months to complete the restructuring.
ARS has fallen by 75% since 2016 (!). Along the way, monthly volatility has averaged 5.8% (equating to a 20% annual volatility.) For investors, this means that their annual Value at Risk90% (VaR) will be 25.8% of their invested equity. Because of the dearth of practical hedging alternatives, this throws cold water on any intended investments.
It's Not Christmas on Christmas Island
Despite the image in our heads of pine trees, reindeers and snow - Christmas Island, the Australian territory is far from a festive wonderland. Previously associated with Human Rights abuses - the Australian government has approved plans to utilize the island as a quarantine zone for Aussie citizens being evacuated from China in the midst of the Coronavirus epidemic.
Reducing the risk of exposure to the mainland Oz is of highest priority to the Home Affairs Minister, Peter Dutton and Australia get to utilize their $27m a year detention center, which currently houses four people.
More than 600 Australians have registered for assistance after China locked down Wuhan and surrounding areas in the Hubei province. Worldwide cases of the Coronavirus has surpassed the Sars epidemic in 2004 with at least 9,962 recorded cases.
Global economy fears continue in the presence of a global epidemic, as we see the stagnation of bubbling conflicts between the US and China trade war and US/Iran hostilities. This week has seen investors dump stocks on exchanges worldwide and whilst seeking traditional safe havens, pushing up the value of the dollar, yen, and gold.
AUD has had a rough ride in the last two years, having fallen 12% since a high in Jan 2018. Sluggish wage growth and a high savings rate have weighed on consumer spending, and the continued downturn in China’s economy contributed to this. Business sentiment is at a six-year low. Wildfires, a continuing weakening Chinese economy, and trade tensions skew risks to the downside.
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In Other News
This Weeks Economic Data Calendar
Keep An Eye On Next Week
Sunday, Feb 2nd
CNY = PMI
Monday, Feb 3rd
USD - Manufacturing PMI
AUD - RBA Interest Rates
Tuesday, Feb 4th
NZD - Unemployment
AUD - Governor Lowe Speech
Wednesday, Feb 5th
USD - Non-Manufacturing PMI
Friday, Feb 7thUSD - Non-Farm Payroll
USD - Hourly Earnings
CAD - Unemployment
Hedge Selection Through Simulation
When CFOs are deciding between multiple hedging strategies, It can seem very difficult and a bit of a shot in the dark. Often, banks and other providers offer a word description, or a simplistic graphic illustrating the payoff at different terminal spot values. However, the key issue - the likelihood of each outcome (and the resulting expected value) is not represented in any meaningful way... READ MORE
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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
Who's been digging?
Gotthard Base Tunnel, Switzerland - 35.4 miles
Seikan Tunnel, Japan - 33.5 miles
Channel Tunnel, Between England and France - 31.3 miles