🌎 Mexico is battered and bruised | Germany is picking on itself | The Money Pit | 3 Things
May 8th, 2020
We are unsure about what the real impacts of COVID-19 will be on future business and relationships. However, one interesting notion was discussed in a recent BBC article in regard to how we say hello, goodbye, thank you, etc and the possible disappearance of shaking hands, hugging, or even kisses. Can we revert thousands of years of bio-social conventions and continue social distancing in the wake of the global pandemic?
Did You Know...
Tibetan monks greet each other in an unusual way, they do something to prove they are not a reincarnation of Lang Darma, a very cruel 9th-century king.
What do they do?
Follow us on LinkedIn
Mexico - Coronavirus Infecting More Than Just Corona Sales
Despite Mexico's $25.6bn stimulus announced in late April, Bank of America has still predicted that Mexico's economy could contract by as much as 8% in 2020, according to the Associated Press – marking two consecutive years of negative economic growth for the first time since the 1930s.
Other than the dwindling sales of six-packs of Corona, there are four key sectors taking a hit, including manufacturing for export, tourism, the oil sector (petroleum sales float roughly 20% of the federal budget ) and remittances sent home by Mexicans abroad and which totaled $36 billion in 2019.
As WTI Crude prices crashed by 300% to settle at -$37 a barrel two weeks ago, the export basket of Mexican oil also plunged into negative territory for the first time ever. According to the daily estimate of the Mexican crude export basket by state oil firm Pemex, the price was -$2.37 a barrel as of Monday, down from $14.35 per barrel on Friday. But in a move unusual for a government, Mexico’s finance minister hedged Pemex’ entire 2020 production at a price of $49/bbl. It had cost $1.37B, but it seems it has put a floor under Pemex earnings for now.
The peso has simply been hammered, losing 32% of its value in 2 months. In fact, it's hard to fathom the peso was 12 to the dollar in 2015. Volatility is very high, almost 14%, which translates to a 20% VaR95. Unfortunately, hedging costs can be high if selling MXN, 4.6%. If selling USD, the profit is almost 7%.
Germany's Picking A Fight With Itself
The European Central Bank was dealt an untimely blow earlier this week as The German Constitutional Court ruled that the ECB's mass bond-buying in order to stabilize the eurozone partly violates the German constitution. According to the ruling, neither the German government nor parliament signs off on the spending - it looks like someone dropped the ball.
The ruling relates to government debt worth €2.1 trillion (£2tn; $2.3tn) bought by the ECB since 2015, but not purchases in the coronavirus crisis. The plaintiffs were a group of German academics, including a former leader of the far-right Alternative for Germany (AfD), Bernd Lucke. They argued the program violates the EU ban on one eurozone member subsidizing the debts of another.
The court decision was being closely watched by the markets. After the announcement, the euro fell to $1.0889 and eurozone debt ratings fell too Reuters news agency reports. Another punch in the gut for eurozone members as they attempt to fight further drops against the USD
Critically, The court also said the ruling "does not concern the current EU or ECB financial aid provided in the coronavirus crisis". It is now left up to the ECB to justify their program and respond to the German court.
EUR continues its two-year slide against the USD fueled by this decision which challenged the Public Sector Purchase Program.
Volatility is not very high at 6.8%, which translates to an 11% VaR. Hedging costs are sub 1%, favoring selling EUR/buying USD.
The Money Pit
The US continues its deep pocket approach to stimulating the economy with The Treasury Department announcing on Monday that it will borrow a record $3 trillion in Q2. The number is more than five times the previous quarterly record, set at the height of the 2008 financial crisis and makes the $1.28 trillion borrowed throughout 2019 look like pittance.
This is on the back of Congress approving more than $2 trillion in stimulus spending, which includes help to small businesses to pay employees and personal checks to individuals. This has been vital to the rising number that are claiming unemployment benefits which has reached 33 million Americans.
The US economy has been slapped around since the virus made its way to its shores causing the national debt to grow by 6.4% to $24.9 trillion, above 100% GDP and last month with the US Congressional Budget Office predicting the budget deficit would hit $3.7 trillion this year.
What does seem to be the consensus, is that for the rapid reopening of the US to be successful, as touted by President Trump, the nation needs to improve its testing and will face an uphill battle to contain a rebound of the virus after it has already claimed 70,000 lives.
DXY is remaining fairly steady over the last few months at 100 (the baseline). It has risen against the basket 10% over the last two years. The basket consists of the Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
In Other News
Taking Fund Overlay To The Next Level
Funds are exposed to currency effects from non-base currency investments in their portfolio. Those effects may be intentional (currency treated as an "asset" class), but this is often not the case and therefore, becomes FX risk. This FX risk can be managed with either a passive strategy or an active or dynamic strategy... READ MORE
Currency Heat Map
This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.
We are a cross-border advisory firm that provides the next generation of innovative FX execution and risk management solutions for institutional investors, investment managers, and multinational corporates.
We educate and empower CFOs to take control of their FX risk and manage their cross-border transactions more effectively. Contact Us for a Transaction Cost Analysis, Risk Analysis or to explore Our Solutions.
Quiz of the week
They stick their tongue out, Lang Darma notoriously had a black tongue, and do this to prove they are not a reincarnation.