• Matthew Fotheringham

🌎 OZ responds to China’s hold on HK | EU looks at a post Trump US | Mexico and US swap compliments

July 10th, 2020

Happy Friday!

We hope you had a fantastic week and didn't suffer like US Sprinter Noah Lyles who had a roller coaster. The current world champion ran a new 200m world record, beating Usain Bolt’s by 0.29secs, only to find out he actually only ran 185m. Well, if you can't beat them, change the rules.

Did You Know...

On the note of rules. In a tell-all tale from his Niece Mary Trump, The POTUS “allegedly” cheated on his SATs. With millions of children taking their SATs each year we thought it would be fun to ask you a question from this year’s SAT test. Courtesy of Heart of Algebra.

The average number of students per classroom, y, at Central High School can be estimated using the equation y = 0.8636x + 27.227, where x represents the number of years since 2004 and x ≤ 10. Which of the following statements is the best interpretation of the number 0.8636 in the context of this problem?

A) The estimated average number of students per classroom in 2004

B) The estimated average number of students per classroom in 2014

C) The estimated yearly decrease in the average number of students per classroom

D) The estimated yearly increase in the average number of students per classroom

(Answer below)

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Australia Ends Hong Kong Extradition Treaty

Australian Prime Minister Scott Morrison has responded to China's imposition of new tough national security laws by agreeing to offer a range of visas from 2-5 years with the possibility of permanent residency. The move by China has been criticized by many governments as law bypassed Hong Kong’s Legislative Council to impose the sweeping security law.

This response from OZ comes soon after the UK offered 3m Hong Kongers a British Overseas National Passport for 5 years and Canada suspended their extradition treaty as well.

The Chinese Embassy in Canberra accused them of “a serious violation of international law” Beijing spokesperson Zhao Lijian was certainly not happy with the decision, telling Australia to “stop meddling” in Hong Kong’s and China’s internal affairs. Claiming that should they continue to involve themselves, they can expect a huge impact on the Australian economy.

China is not known in the nursery for playing nicely with others. US-China trade tensions have been the constant background noise for the last three years and Australia is putting themselves in the firing line. China buys a third of all Australian exports, with Australia sourcing a fifth of its total imports from China, secondary only to the EU.

Australia's economy is inextricably linked to China and the Australian Reserve Bank demonstrated this when they modeled the effect of a slow down on the Chinese economy, determining that a 5% reduction in the Chinese economy would cause a decline of 2.5%.

Although Australia has been met with marginally brighter news from the IMF decreasing their prediction of Australia’s recession from 6.7% to 4.5%. They are still going through the largest quarterly decline in consumption in 34 years and an economic contraction of 0.3% as of March.

The reverberations of their strong stance against China won't be instantly felt, but it will be worth keeping an eye on the progression of this relationship and whether there is an opportunity for another trade war.

AUDUSD is one of the more volatile major pairs at nearly 10%/annum. It has recovered essentially all of its Covid19 drop (which contributes to the volatility) despite seeing a slight spike in cases (thank you Melbourne). Hedging costs are de minimis at .16%, with different tenors favoring either direction.


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EU Eye Post-Trump-Era But Don't Expect a Quick Fix

It won’t come as a surprise to many that EU policymakers would be happy to see the back of President Trump. His aggressive trade pacts and lack of interest in things such as climate control have been widely criticized on the continent.

But, even in a possible victory for Biden, Europe will see the U.S facing tougher times than when under the Obama government. The context is different now, the US and China are experiencing more dense and complex trade conflicts; Trump has made serious accusations against Russia, saying that Russia is threatening to undermine the main agreements between the two countries, such as transparency, cooperation and trust. Also, the recent cases involving Ukraine and Joe Biden could disrupt a possible dialogue between the US, western and eastern Europe. Therefore, foreign affair policies to re-sew multilateralism agreements will have to be much more intense under a potential Biden administration.

On the other side of the coin, one thing the EU can expect from an incoming Democrat President, would be the reversion of withdrawing from the World Health Organization. Another example is on climate policy, if Biden wins, he is likely to jump straight back into the Paris climate change accord that Trump quit.

But still, the other side of the coin seems to weigh more.

Therefore it is better for Angela Merkel not to open the champagne just yet.

EURUSD has now more than recovered from its COVID drop and is back at the same level as the beginning of 2019. Volatility is medium, at about 7%/annum. Hedging costs are almost a percent, favoring selling EUR.


Mexico and US Swap Compliments Despite Their Turbulent Relationship

Many Mexicans recall in 2015, the presidential pre-candidate Donald Trump, accusing its southern neighbor of sending people to the United States "with a lot of problems," including "drugs, crimes and rapists". Ever since Mexicans have wanted there to be a response, and many have felt that it is clear that President Obrador does not wear the trousers in this relationship and he has been consequently chastised for being too passive towards Trump’s administration.

Therefore, it is not surprising that the Mexican president faced several criticisms before his first international visit to the White House last Wednesday. A pre-trip poll published by the newspaper El Financiero showed 59% support for traveling to Washington, though 85% of Mexicans disapproved of Trump.

Apparently, the two leaders are now in the honeymoon phase. The US president has pointed out to the press that "the relationship between the United States and Mexico has never been as good as now." He also highlighted that the future of the two nations "has no limits".

The back and forth of compliments continued when the Mexican president also praised Trump. " You [US nation] did not intend to treat us as a colony, on the opposite, you honored our condition of an independent nation".

The only declared objective of the meeting was to celebrate the new Free Trade Agreement between Mexico, the United States, and Canada (T-MEC), which in practice is only a minimum reform of the Free Trade Agreement in force between the three countries since 1994.

However, the real interests of both sides were a little blurred. A celebration of North American free trade by two protectionists, and a Mexican leader who complains about “neoliberalism”, but praises billionaires for their “social concern”. A clear situation that has two opposite features and therefore seems strange.

From Trump's perspective, the visit of the Obrador takes the public attention away from rising coronavirus infections and mass protests over police violence. With its focus on the trade pact and the exchange of praise by both leaders, it creates a perfect climate for Trump to try to win the votes of Latinos, to cool the heated debate on immigration and to mask that the American economy is going through a great recession.

From Obrador's perspective, it is better to be good friends than start a new battle, which could be a very costly one and with low-odds of win.

US. GDP Annual Growth Rate
Fig 1. US. GDP Annual Growth Rate

Daily COVID-19 new cases in U.S.
Fig 2. Daily COVID-19 new cases in U.S.

The dollar index has actually fallen to a little bit below its multi-year average, from a high of well over 100 in late March.

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

Choice D is correct. When an equation is written in the form y = mx + b, the coefficient of the x-term (in this case 0.8636) is the slope of the graph of this equation in the xy-plane. The slope of the graph of this linear equation gives the amount that the average number of students per classroom (represented by y) changes per year (represented by x). The slope is positive, indicating an increase in the average number of students per classroom each year.

You can find more SAT sample questions here

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