• Matthew Fotheringham

🌎 Oil's negative impact | Stormy seas in Japan | Israeli frenemies | 3 Things

April 24th, 2020

Happy Friday!

Let’s all make it through the weekend by not ingesting disinfectant to combat COVID-19, despite what came out of the White House.

Paul Stafford, Head of Advisory sat down with MoneyCorp for their new podcast this week. Admittedly, he gives no advice on COVID cures but does give some key insights into the market and volatility.

Did You Know...

In regard to Earth Day on Wednesday, did you know that 27,000 trees are cut down a day so that we can have toilet paper?

The oldest (named) living tree in America is Methuselah out west in California. Any idea how many years it’s been around?

(Answers below)

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Poor Oil

Oil has been the quiet ravager of economies whilst COVID-19 has taken center stage. Commodities currencies globally have been heavily affected by the imbalance in supply-demand in the industry as the world confronts a new sedentary way of life. Albeit maybe a short term outlook, but damages on emerging economies could take years to rectify. We take a look into Canada and Venezuela at how the North and South American nations have faired in the dwindling oil economy.

The Trump Administration has ordered Chevron to halt oil production in Venezuela. It's President Trump’s latest effort to pressure Venezuela's President Nicolás Maduro by starving the country of money. With the world oil market in tatters, the country’s oil production has imploded even more because of deep economic and social dysfunction, and tough sanctions imposed by the US government. Chevron is the last remaining American oil producer in Venezuela. The order doesn't mean the company has to leave the country altogether, it just won't be allowed to export oil or produce oil from there.

Of course, Canada is an OECD country, but oil prices have deeply affected the industry and economy. A Rystad Energy analysis shows that Canada is the oil producer most affected so far, with the Q2 damage estimated to reach above 1.1 million barrels per day (bpd. This is mainly because Canada’s cost of production and transport is much higher than other oil producers, at a break-even o0f $45/bbl before capex. Also, Western Canada’s chronic lack of storage capacity is emerging as a key constraint on upstream volumes in this low-demand environment.

The Loonie has suffered a fair bit. It’s still near its worst level since 2016, and far from the heady days of 2012 when the Loonie was worth more than the USD.

Hedging costs are essentially zero out as far as two years.

To even consider the Venezuelan exchange rate as anything resembling reality would be a mistake. Here is the official rate chart, showing an egregious depreciation. The International Monetary Fund estimates that inflation in Venezuela this year will reach 200,000 percent - and that the economy will contract by 35 percent. Most likely, any real international business is probably only conducted in USD.

US Dollar Index


Japans Preparing For Stormy Weather

COVID 19 cases spiked again this week despite 2 “Abenomasks” being distributed to each household. Coupled with a potentially devastating 30m Tsunami brewing off the North Coast, Japan is certainly in for a tough few weeks, so much so they have downgraded themselves. The government released a rather gloomy report setting a pretty dismal scene.

They expect a “significant decrease” in 6 of the 11 major economic components including both industrial output and private consumption. Industrial production is expected to decrease by 8.4% in 2020, which is down 7.3 percentage points over the previous month’s projection. In response, the government is preparing a package of measures larger than adopted during the 2008 fiscal crisis.

USDJPY has been one of the more active and volatile of the major pairs. JPY spiked to 102 before retreating back to its longer-term median of 107, all in the space of a few weeks. This is somewhat surprising as both currencies are “risk-off” - you’d expect less relative movement, yet annual volatility has spiked to over 8%.

Fortunately, hedging costs are only about 1%/annum, favoring JPY sellers.


Best Of Frenemies

Israel's Prime Minister Netanyahu and Blue and White party leader Benny Gantz have agreed on the formation of a national emergency government, ending more than a year of deadlock and three failed elections. Could a country be more evenly divided? Netanyahu will continue to govern for the next 18 months, after which Gantz will take over. However, the fat lady has not sung yet. The high court may consider Netanyahu's mandate illegal because of his criminal indictments. The agreement also includes plans for annexation of parts of the West Bank (supported by the Trump Administration), effectively killing the peace process.

The ILS has shown surprising strength during the COVID outbreak. It briefly rose from a low of 3.4 to 3.85 before retreating back to 3.41. Overall volatility over the long-term is fairly low at 6%.

Hedging costs are substantial, 5.8%/year, heavily-favoring ILS sellers.

In Other News

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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

Methuselah 4,851 years old and is a Great Basin Bristlecone Pine. Methuselah was beaten out as the oldest non-clonal tree when another Great Basin Bristlecone Pine was discovered to be 5,068 years old. It is not yet named. Feel free to send us your name suggestions.

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