• Matthew Fotheringham

🌎 EU to reject US citizens, two steps forward and one back for US and commodities are up| 3 Things


June 26th, 2020


Happy Friday!


We are excited to announce a fantastic addition to our team Matheus Zani. Matheus will be focussing on assisting our Latam based clients with their FX risk management and hedging needs.


We are thrilled to have him on board and looking forward to building on the success we’ve had in Latam.


Did You Know...


Countries from Latin American are big producers and exporters of agricultural products. Brazil is the largest exporter in the region, followed by Argentina, Mexico and Chile.


But, would you know which are the three most exported products?


(Answers below)


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EUR

Europe planning on blocking US travelers


With an air of the boots now on the other foot, European Union nations could block visitors from countries with severe coronavirus outbreaks, including the United States. How embarrassing. The EU is using a set of objective criteria to construct the list.


One criterion is whether the country can "be considered as being in a comparable or better epidemiological situation as the average in the EU+ area" with regard to the number of new infections, the trend of new infections and response in areas such as testing, surveillance, contact tracing, containment, treatment and reporting.


That probably leaves the US out. The US has the highest number of coronavirus deaths and infections in the world. In the US, at least 2,346,937 have been infected and 121,224 have died.


Fortunately, among the options being discussed are travel restrictions based on US geographic regions, rather than a sweeping ban on the entire country, since some regions have higher infection rates than others. Arizona, Arkansas, California, North Carolina, South Carolina, Tennessee and Texas have the highest rates, and so will likely be on the “bad state” list.

#roadtrip!


EUR has bounced back from its modest Covid low, and is currently above the exchange rate at the beginning of the year. Volatility is still low at 6.7%/annum. Hedging costs are fairly low at around 0.8%, favoring selling EUR.




Feature Article


BRL Currency Report


Our new Latam Consultant Matheus Zani wrote this comprehensive currency report for BRL, a must read for those with BRL exposures. Read in English or Portuguese.

Visit our Intelligence Center

USD

Quick everyone to the pub before they close again!


Remember all those people on the beaches in Florida a month ago? Yeah, they all got “The Vid”. “Never underestimate the power of stupid people in large groups.”

George Carlin


How did the markets react? Well, the Dow quarantined itself, plunging 700 points on the back of a record jump in Floridian coronavirus cases. The issue now is that they are all coming back home with it.


Trump attempted to calm the markets by stating that “when you do more testing, you have more cases. We have more cases than anybody because we do more testing than anybody. It's pretty simple,”.


A poorly timed “joke” around the need to slow down US testing was followed by the news that the government had removed funding for a number drive-thru testing facilities in Texas (1 of the 6 states that recently saw a large increase in cases and hospital admissions). These testing centers will now have to be state-funded. Texas Governor Abbott (who allowed restaurants to open their doors 55 days ago) hit pause on any further reopenings.


However other states have been slow to react as more states continue to go through their phases. New York, once the epicenter of the virus in the US, is now allowing restaurants to serve patrons outside, barbershops to reopen and allow shoppers to peruse retail outlets, but one would have to ask for how long...


Data is not all doom and gloom from the states as US jobless claims come in higher than forecast for two weeks in a row now. DXY dropped over 1% at the beginning of the week but has managed to pull back the initial losses.



AUD BRL


A tale of two commodity currencies


For some mysterious reason, there is a surge of commodity prices. Copper is up 25%, iron up 20%. Even oil has recovered from its outrageous low in mid-April.


WTI - Source: macrotrends.net


The world’s economy is just now opening up a bit. Possibly it’s irrational exuberance, possibly it’s a result of an ocean of liquidity from the FED and ECB.


In either case, it's interesting to look at two of the main commodity countries, and how they’re rising to the opportunity. In Australia, where the COVID response was rapid and effective (see previous COVID chart), they’ve been able to keep the mines running, and even increase exports this year.


On the other hand, Brazil’s response to COVID has been febrile and even those efforts have been undermined by its president, Bolsonaro. As a result, production has been crippled, and Brazil won't participate (at least right away) in the commodity boomlet.


The AUD has sharply recovered from its COVID dip and is nearly back to its 18-month average. Volatility is high at 9.4%, but hedging costs are nil.


On the other hand, BRL has NOT recovered very much at all from its COVID-led fall. In the chart below (note BRL = base ccy), BRL is still 35% off its 2 year mean. Fortunately, hedging costs are much cheaper than they have been historically - only 1% or so, favoring selling USD.


All consensus the Brazilian economy is expected to recover in the second half of the year. Nevertheless, it depends very much on how Bolsonaro's government will respond to the spread and severity of the COVID-19 pandemic, in other words, it will depend on the government's capacity of maintaining a dialogue with local governments.


Against the current backdrop, the IMF on Wednesday (24/06) slashed its 2020 GDP outlook to -9.1% from -5.3%, indicating a smooth contrast to the latest forecast of Brazil Central Bank of -6.4%


The current scenario indicates that we might see more volatility in the Brazilian currency.



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


Answer


According to the Trade Trends Estimates report of the Inter-American Development Bank, soybeans, coffee and sugar figure among the most exported in 2019.


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