• Matthew Fotheringham

🌎 EU Sues The UK | Aussie Salvation Efforts Begin | Brazil's Rejection


October 2nd, 2020


Happy Friday!


If you missed the presidential debate on Tuesday night, go back and watch it especially if you have finished Cobra Kai and need to see more old guys duking it out. The Commission on Presidential Debates has suggested new rules for the next debate, possibly involving muting microphones or shock collars (not that we think it will make much difference). Whether the second debate goes ahead or not is under question as President Trump has tested positive for Covid-19.


Believe it or not, 3 other things happened this week that may have gotten lost in your news feeds.


Did You Know...


The first televised presidential debate was held in 1960.


Do you know who the two candidates debating that night were?


(Answer below)


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EUR GBP


EU Sues The UK



In another Brexit twist, the European Union are flexing their legal muscle after they launched a case against the UK on Thursday. The UK is firmly on the naughty step after passing the new Internal Market Bill through the House of Commons earlier this week. But why is the EU so mad?


The EU believes that the Bill is undercutting their earlier divorce deal, and is thus breaching trust. The withdrawal agreement at risk, which was originally agreed to by both parties, took years to complete and involved negotiations with every member state. Thus meaning that many in the EU see it as a sacred contract at the heart of European politics. The fact that the UK intends to ultimately ignore it, has struck a nerve with many on the continent and hence why legal proceedings ensued.


However, although legal proceedings sound impressive, there have been questions about how strong the EU’s legal muscle is and how much power it wields. After the formal letter was sent by the EU, the British government was quick to highlight that in 2019, there were around 800 of these infringement cases, involving 27 member states. Further to that, this is the 94th such action to be opened against the UK, hardly a glowing record, yet many of them remain unresolved, PM Johnson will be hoping this new action follows the same path. Other EU leaders have questioned the weight of this action with Dutch PM Mark Rutte describing it as little more than an act of administration and a nuisance rather than a calamity.


Nevertheless, the UK has a month to respond to the EU’s formal letter of complaint and the threat of legal action provides merely an insight into the divided nature of Brexit negotiations. In the meantime, we will likely see trade talks continue and there are whispers that there is progress on fishing rights and trade aid, two notable sticking points.


It’s important to note that if a deal is agreed by the end of the year, then the infringement proceedings will rapidly fade as a much larger story will look to take its place.


FX

EURGBP annual volatility is about 8%. Hedging costs are about .63%, favoring EUR sellers.


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AUD


Dreams Of Surplus Are Long Forgotten



Like the rest of the world, in early March, Australians were forced to take a break from surfing and barbeques on the beach to combat the global pandemic. Although there were some difficulties in getting public buy-in as protests in early September highlighted, Australia is now reaping the rewards of a tough lockdown as new cases are fewer and further between. So what’s next for the land Down Under?


Well, Prime Minister Scott Morrison has the inevitable task of having to shore up an economy after it plunged into its first recession in 30 years. Easier said than done.


Since the Covid-19 outbreak, Australia’s economy contracted by the most on record in Q2 2020, with unemployment climbing to 6.8% and is forecasted by the central bank to hit 10% by the end of the year. A bleak outlook indeed.


The government has tried to get in front of the problem and has responded with stimulus packages worth A$314bn. Furthermore, this coming week the conservative government will present their latest plan for the federal budget, which is expected to include tax cuts and infrastructure spending to stimulate growth and fight rising unemployment.


Although we don’t live in a typical world at present, this is in sharp contrast to Morrison’s narrative 12 months ago and where they hoped to be, which was focussed on returning the budget to surplus for the first time in nearly a decade. Fast forward 12 months, Deloitte Access Economics is anticipating a deficit to sit around A$198.5bn.


Understandably, it seems budget repair talks have been taken off the table by the government as they look to fight the growing problem. That being said, there is some doubt that we will see PM Morrison spending too freely considering his original conservative budget agenda underpinning decisions.


FX

AUD appears to have made a complete recovery from Covid-19, and even strengthened above 2019 levels. AUDUSD is one of the most volatile majors at 10%; which equates to 16% VaR. Fortunately, hedging costs are nearly zero (5 pips/yr)


BRL


Bolsonaro Rejects Bidens $20bn Pledge

Despite a chaotic Presidential debate on Tuesday, one interesting and unexpected topic came up...Deforestation of the Amazon. Although seemingly out of the blue, after being asked about how to address the fires that have been devastating part of the U.S West Coast, former Vice President Biden also mentioned the recent fires in the Amazon and said that one of his proposals is to work with countries around the world to attack global warming. However, Biden went a little further than that.


He went on to to say "rainforests of Brazil are being torn down, are being ripped down.", and said he would be "gathering up and making sure we had the countries of the world coming up with $20 billion to say 'here's $20 billion, stop tearing down the forest and if you don't, you are going to have significant economic consequences”.


The fact that Democratic candidate Joe Biden touched on the issue of high rates of deforestation and fires in the Brazilian Amazon reflects the increasing attention of the West to global warming and the environmental issue. This is after fires in Brazil’s Amazon increased 13% in the first nine months of the year, compared to a year ago and the region suffered its worst run of blazes for a decade according to space research agency Inpe. Currently, there are 28,892 active fires in the amazon which spans nine countries according to Nasa.


Despite these disturbing signs, President Bolsonaro rejected Biden’s comments as a “cowardly threat” towards Brazil’s sovereignty. Brazil’s president has always taken a hard line on his views towards the Amazon. Agriculture, livestock, and forestry account for more than 22% of Brazil's GDP (fig 1). As exports from these sectors are responsible for ensuring a surplus in the trade balance.


This is evident in figure 2 below, which reveals that since 2008 the trade surplus of Brazilian agribusiness has overcome the trade deficit seen by other sectors of the Brazilian economy, and successive surpluses have been guaranteed to the Brazilian Trade Balance.


Due to the success agribusiness has been having, and the current economic climate, it is unlikely that Bolsonaro will change his stance and his plans to open up more parts of the Amazon for mining, logging, and agriculture will continue.


FX USDBRL is one of the most volatile currencies in the world at nearly 17%/annum. Hedging costs have come down significantly, but are still around 1.8%/annum, favoring selling USD.


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


The first presidential debate was between Richard Nixon and John F. Kennedy. Trust us it was a very different affair compared to last Tuesday.



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