• Matthew Fotheringham

🌎 LATAM's new woe | US-China war of words | EU's historic proposal | 3 Things

May 29th, 2020

Happy Friday!

Twitter has fired shots at President Trump this week, censoring a tweet for glorifying violence and adding a fact-checker link to another.

Trump responded by signing an executive order looking for social media platforms to be held accountable for content posted by their users… could we be entering the age of social media censorship?... Are we already there?

Did You Know...

There are 152 million daily active users of Twitter - that’s a whole lotta trolls!

Can you name the three countries that have blocked twitter?

(Answers below)

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LATAM Now Epicenter of COVID19

Adding to the economic woes of Latin American countries, their basic medical infrastructures are now being pushed to their limit as LATAM surpasses Europe and the United States in the daily number of reported Covid-19 infections. Brazil is ill-prepared for the emergency- expenditures on its national health service have been slashed by ⅓ since 2017.

As countries around the world start to ease restrictions, many residents in LATAM are being ordered to batten down the hatches; however, Brazil ‘s response is fragmented, with Bolsanaro calling for less, local leaders calling for more. Bolsonaro has downplayed the pandemic; and lost two health ministers in just four weeks as a result.

In Brazil, the number of new cases reported last week was the highest for a seven-day period since the outbreak began; indicating the curve is rising, not flattening. Brazil recorded 374,898 infections and 23,473 deaths by Monday. A U of W study warned that Brazil’s death toll could rise 5 fold - to 125,000 - by August.

Fitch Ratings estimates Brazil’s GDP could drop 4% in 2020. International investors were expecting key economic reforms that have totally stalled, and Brazil will enter 2021 with a very large debt load.

Source - Johns Hopkins University

Peru and Chile are not far behind Brazil, both competing for the world’s highest infection rate per capita. By August, Peru is projected to have 20,000 deaths, and Chile 12,000.

While BRL has recovered about 10% from its early May low, it's still down over 33% from the beginning of the year. The pair exhibits extremely high volatility, almost 15%/annum. This translates to over 24% VarR.

Hedging costs are much lower than they used to be; only 1.25%/annum, favoring USD sellers

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US-China Tensions Worsen

In what might be called a Tiananmen Square situation, China declared, in effect, that Hong Kongers deemed to pose a “threat” to the party will be dealt with brutally. The new security law will create as yet undefined crimes of subversion and secession, terms that have been used in China to lock up dissidents.

When this national security law on Hong Kong is made, it will be directly promulgated, so it doesn't need to be implemented by the Hong Kong legislature. This new law was not unexpected. One turning point back in 2014 was a Chinese government white paper that said China had “comprehensive jurisdiction” over Hong Kong.

Hong Kong is was a global commercial hub not only because it is next to the Chinese mainland, but also because it enjoyed the rule of law. This week the US secretary of state, Mike Pompeo, declared that “facts on the ground” show Hong Kong is no longer autonomous. This allows America to slap tariffs on the territory’s exports (worth $66B in 2018) and restrict sales of sensitive technologies to HK firms. Investors are scared, and drove the Hang Seng Index down by 5.6% on May 22nd (the biggest drop in five years.)

The HKD is essentially pegged to the USD, with nearly zero volatility.

CNY continues to fall against the USD, at near-record lows. Hedging costs are about 1.5%/annum, favoring USD sellers.


European Union's Historic Proposal

Ever since the beginning of the European Union, the one founding principle survived and change has been resisted - until now. Even during the 2008 financial crisis, the EU’s wealthier member nations resisted the notion of collective debt. However, all that could change with the European Commission proposing on Wednesday to raise 750 billion euros on behalf of all its members to fight the economic effects of COVID-19.

Some European countries have economies that are expected to shrink by as much as 10% and there is a general consensus that big action like this needs to be taken. However, it should be noted that without a looming epic recession, a proposal like this would have found its way to the trash heap.

Now don’t get too excited - the plan still needs approval from 27 national leaders and their parliaments. This task will be easier given the recent and rare display of unity between French and German leadership on the matter.

This proposal tiptoes the EU one step closer to a shared budget and vests more authority in Brussels; which is starting to resemble a central government.

EUR showing some strengthening, after reaching the 10 yr low of 2017 (1.04). Volatility still not excessive at nearly 7%/annum, and hedge costs remain sub 1%

In Other News

Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.

Deaglo Currency Heat Map

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Quiz of the week

No Twitter in;

  • China

  • Iran

  • North Korea

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