• Matheus Zani

🌎 India’s economic gloom | Crypto Race | China's ban on Australian coal

Updated: Nov 24


October 16th, 2020


Happy Friday!


Apple finally released the iPhone 12 5G this week, for many, it’s a bit of a novelty, which brings cutting-edge technology, but for those who owned the first version of the device, it is a stark reminder of how time has flown since 2007.



Did You Know...


The 5G networks will move data at 100 times the speed of the current 4G networks. It's fair to say that the mobile industry has made breathtaking advances since the first mobile phone call was made back in 1973.


Can you name the first country to adopt 5G on a large scale?



(Answer below)


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IMF deepens India’s economic gloom



The International Monetary Fund (IMF) played a lighter tune this week as forecasts for the global economy were not all doom and gloom. Some developed countries and China have recovered faster than expected from the lockdowns imposed to combat Covid-19. However, this does not play true for everyone the IMF warned that the outlook is worsening for many emerging countries.


The IFM expects a 4.4% worldwide contraction for 2020 in its latest World Economic Outlook, a better number than the 5.2% drop expected in June when most small businesses and companies were shut. Even so, the IMF pointed out that this is still the worst economic crisis since the Great Depression of the 1930s.


Among the emerging countries, the IMF significantly downgraded India's growth forecast for the fiscal year 2021 and, now, see the South Asian nation’s gross domestic product shrinking by 10.3%, facing the biggest contraction of major economies in the wake of the Covid-19 pandemic.


Fig 1. GDP and Inflation


What is the evidence that India is going through a horrible crisis?


At the end of March, the Indian government imposed a nationwide lockdown, which put around 1.3bn people out of work and left many families struggling to eat. Of course, it came at a huge cost, causing the economy to contract 23.9% in the June quarter from a year ago as businesses and jobs were devastated. Authorities have failed to get the pandemic under control since then, with the number of coronavirus cases exceeding 7 million, second only to the U.S.


What has been done so far?


On the monetary policy side, the Reserve Bank of India (RPI) has cut its benchmark repo rate very aggressively early on but has held it at 4% during its October meeting as the country's inflation achieved the RPI’s inflation target of 4%+-2%.


Fig 2. India Interest Rate


There have also been some efforts recently on the structural side to improve the medium-term growth outlook. The Indian government had progress on labor reform bills and the farm bills, which not only provide companies with a little bit more flexibility in terms of hiring options but also provide more social security and safety net options for workers.


It seems that a lot of efforts and improvements are underway, however, the IMF’s gloomy forecast warns that India's Prime Minister Narendra Modi has a huge challenge ahead to put India on a recovery path.


FX

The Indian rupee has been less impacted by sell-off risk sentiment when compared to its emerging peers. The INR fell just 2.5% against the USD in 2020. The Rupee’s performance can be associated with a better external account position and strong FX intervention by the Reserve Bank of India.



First Look


When is FX hedging worthwhile? - Decoding risk and forward points



Our Head of Advisory Paul Stafford has written an article that all those with international FX exposures need to read. Understanding the efficacy of forward contracts is an essential part of deciding on the correct hedging strategy.



Read More Here


CNY


China sprints ahead in the Crypto Race



In the past week, the Chinese government has distributed more than $2million worth of its new digital currency ‘DCEP’ in an effort to attain international currency supremacy. China “Usain Bolted” ahead of the world in becoming the first country to launch and implement a sovereign digital currency. However, this one comes with a number of caveats...


What is DCEP?


DCEP was introduced by the Chinese government to replace the circulation of cash. DCEP is built on Distributed Ledger Technologies (DLT)and cryptographic technology, which facilitates the transaction of currency between two DCEP wallets, without requiring either party to be affiliated with a bank. This technology will ultimately cut financial intermediaries and other money service providers out of the picture.


The People’s Bank of China stated the purpose of implementing a sovereign digital currency was to eliminate financial crime such as counterfeit, money laundering, and the financing of terrorism. However, China then soon turned around and said its intention was to dethrone the US dollar as the world’s global currency; currently, the US dollar accounts for 38.96% of all currencies held by central banks globally.


However, DCEP comes with some interesting caveats. Chinese government authorities will hold the ability to monitor and revert all transactions, and deactivate a DCEP wallet at any time. With issues around Chinese surveillance, the question is; will the western world ever fully accept a Chinese monitored currency?

Fig 1. Foreign-exchange transactions


The yuan currently sits in fifth place behind the JPY, accounting for 1.91% of global foreign-exchange transactions (Fig 1). However, the People’s Bank of China projects this percentage could increase to approximately 10% by the end of 2030, leapfrogging the JPY and GBP.


FX

China's economy has been picking up momentum after several economic indicators showed solid improvements in the country's economic growth. Although the People’s Bank of China (PBOC) cut the forex risk reserve ratio for forward contracts — from 20% to zero - in an attempt to cap the recent strength in the CNY, the Chinese yuan may gain further ground in the near term.


AUD


ScoMo remains cool over China coal ban


Relationship status update: It's complicated...


The Australian Federal Government has launched an investigation into China’s possible import ban after BHP announced that Chinese customers have requested deferments on their coal orders.

According to a highly confidential source, Chinese steel mills and power stations have received orders to stop the use of Australian coal, and local ports have been instructed not to unload coal originating from Australia. That being said, the transparency of China’s import ban is as clear as mud at this point in time.


Despite offering “reassuring” comments on Tuesday, Australian Prime Minister Scott Morrison is surely now beginning to sweat. China is the largest importer of Australian coal, accounting for approximately 23% of its metallurgical coal and 15% of its thermal coal (Fig1).



Fig 1. China’s importation of coal


Coal is now the latest exported commodity to be crossed off the list due to the Australia-China fall out. So far, China has implemented tariffs on Australian barley, beef, and wine exports. Australia also now faces the prospect of losing Chinese international students due to the racist mistreatment of students. According to the Australian Department of Education, Chinese students contribute approximately 33% of Australia’s net international education income (USD $27.26 billion).


With things only getting worse, the largest concern out of all of this is the blow to Australia’s frail economic conditions. Australia is already suffering through the first recession in 30 years, and unemployment (6.9%) is now beginning to creep back up. Now with the loss of its biggest trading partner, the question still lingers: what’s next for ScoMo and the land Down-under?

FX

The AUD remains vulnerable to further corrections, fluctuating in response to changes in market risk sentiment, mainly driven by U.S fiscal stimulus expectations and equity performance. Over this week, the AUD dropped to a one-week low after the central bank chief Philip Lowe hinted of a possible rate cut. USD/AUD annual volatility is about 12%.


In Other News


Saudi Arabia loses vote to stay on the UN Human Rights Council; China, Russia, and Cuba win seats


Gold rises 1% on dollar weakness, economic uncertainty


Amy Coney Barrett: Trump US Supreme Court pick grilled on presidential powers


Brexit: the UK 'must not lose jobs over fish in trade talks'


‘Massively concerning’ jobs report sends a signal that the economic recovery could be fading


Viewpoint: Why Turkey is flexing its muscles abroad


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


On December 1, 2018, South Korea became the first country to offer 5G on a large scale.



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