🌎 Trumps COVID Allstars | BoJo Woes | EM's taking lumps | 3 Things
March 20th, 2020
This week has been boring and very little has happened…
The world has been brought to a skidding halt by an infectious virus, weirdly predicted by Bill Gates in a TED talk in 2015. Although Bill didn’t say anything about people panic buying toilet roll… so he doesn’t know everything...
On a serious note - our thoughts are with everyone that is affected. For those that need it, here are our top tips to creating the perfect home office bunker and surviving the next couple of weeks.
Did you know?
With all this talk of the emerging market, the International Monetary Fund (IMF) classifies 24 countries as em’s. With China and India being the largest
Can you name all 24? (Answers below)
TRUMPS COVID ALLSTARS
People around the world:
“Oh no - live sport is canceled, what am I going to watch?”
President Trump and COVID-19 team:
“hold my beer…(with gloves)”
In what has been a strange daily parade of elbow bumping and figurative back slapping, Trump and his Allstars took to the airwaves and reassured the world that he and his team would destroy the invisible enemy.
They’ve implemented a task force of private companies to revolutionize the virus testing procedures, and empowered the hospitals and medical professionals around the US to be able to make swift and agile decisions.
They expect to administer 25m+ tests and produce results in as little as 2 days, by allowing prescriptions via video conferencing, drive through testing and automating test results.
The initial announcement was well-received during the late afternoon trading session on Friday starting with a 10% hike for Google and the other companies such as Labquest and Walgreens.
However, it was short-lived when Sunday saw the FED cut another 100bps which sent the markets absolutely bonkers.
Since then we have seen a more authoritarian approach to “voluntary” self-containment, with cities being put on lockdown and both the Mexican and Canadian borders being shutdown. New, strict dining rules and 8 o’clock curfews are some of the strategies being implemented to stop the spread. One thing is for certain- we aren’t out of the woods yet. Many people believe that this could be life as we know it for at least a month. Hang in there!
The USD has been appreciating against almost every currency, including the traditional risk-off CHF and JPY. Against the EMs, it's been an absolute rout.
BOJO WOES - GBP DROPS 20%
There are horror movies that aren’t as gory as watching GBPUSD this week. The once-lauded Sterling hit its lowest level in 35 years as it took hits from all sides; losing over 20% to USD and 15% against the EUR in a matter of days.
Sterling fell despite the BoE’s relatively swift and strong rebuttal to the US rate cuts, with UK interest rates currently sitting at the lowest level ever. Failure to respond swiftly to the Covid-19 threat, and continuing delays in post-Brexit trade agreements has compounded the misery and seen Sterling officially lose its safe-haven currency status.
The situation looks pretty dire. The NHS, which has complained about being underfunded for years, is at risk of being completely overwhelmed. The money to prop it up is going to only add to the taxpayers growing bill.
BoJo has been broadcasting his updated message of social distancing, proclaiming that the UK “will turn the tide in 12 weeks”. He promised 150 hospitals the equipment they need to combat the virus. Many manufacturing plants have switched their operations to focus on providing 1000’s of care workers with respiratory equipment (including formula one) and protective packages.
The UK plans to be able to administer 25,000 tests a day in 4 weeks’ time. This may not seem as impressive as President Trump’s plans, but is certainly a step forward in containing the virus.
Following another rate cut to record low 0.1%, Sterling is down massively against the USD. With this week’s losses of 15% adding to the multi-year trend. It’s hard to believe it was only 2 years ago GBPUSD sat at 1.43. GBPUSD has been one of the most volatile major pairs, with monthly volatility of 3%. Fortunately, forward points are in the sub-1% range, so managing risk is inexpensive.
USD MXN CLP COP ARS AUD CAD RUB BRL
EMERGING MARKETS CONTINUE TO TAKE LUMPS
We spoke about how emerging markets had taken huge currency hits last week. Well, it turns out things didn’t let up this week either.
The surging US dollar and the drop in oil and lack of demand for commodities have all contributed to the free fall we are seeing. However, it is the carry trade that has been the biggest cause of weakness here, with currencies across LATAM and Africa registering 20-30% losses against the USD. Here are some representative LATAM and African currency plots (BRL elsewhere in this newsletter). Interestingly, they had all peaked around the first of 2018.
An interesting new headache for airlines arises from commodities. Airlines usually hedge some or most of their fuel costs, as fuel represents the largest cost in their budget. Hedges lock in future prices, and now they’re stuck with long-dated contracts that are way out of the money as oil falls. As fares drop due to demand and restrictions, fuel costs will make every flight a loss.
The Fed on Thursday, in an attempt to meet the heavy demand for dollars around the world added additional swap lines to nine countries;
$60bn each to:
$30bn each to:
The Fed already had standing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.
The expansion of the dollar swap lines allows foreign central banks to meet the needs of companies and financial institutions rushing for dollars as the global payments system undergoes severe strain due to the coronavirus.
Although the additional swap lines may give respite to the struggling banking system, the moves have exacerbated the rise of the greenback, another reason the USD has skyrocketed against almost every currency.
Here we plot each commodity ccy as the base currency to show the same “fall off a cliff” pattern amongst all of them. All are exhibiting 10-15% annual volatility.
In Other News
This Weeks Economic Data Calendar
Keep An Eye On Next Week
FX proxy hedging using machine learning
With emerging markets in disarray and hedging costs changing daily it may be time to look into alternative ways to managing your EM risk... READ MORE
USD EUR GBP ZAR COP BRL NZD NOK
Currency Heat Map
This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.
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