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CRUDE OIL TRIMS LOSSES, BOOSTING COMMODITY CURRENCIES, STILL EYE DOWNSIDE IN USDJPY, GERMANY SUFFERS AND ACCUSES THE ECB

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CRUDE OIL TRIMS LOSSES, BOOSTING COMMODITY CURRENCIES, STILL EYE DOWNSIDE IN USDJPY, GERMANY SUFFERS AND ACCUSES THE ECB

By Arnaud Masset, market analyst, Swissquote Bank

  • Commodity currencies may further recover thanks to crude rebound
  • NZD/USD broke the 0.6966 resistance having received a strong boost from the commodity rally and improving risk sentiment, however we prefer to remain cautious as the country’s economic outlook is still uncertain.
  • The Aussie should continue to ride the positive trend as commodities strengthen further; however the pair is extremely vulnerable to renewed Fed rate hike expectations and negative signals from the Chinese economy
  • Financial markets carefully scrutinize German economic indicators with the ZEW due to be released later today
  • The single currency should continue to push lower against the Swiss franc
  • We remain bullish EURUSD as the Fed’s renewed dovish stance should continue to add upside pressure

As expected, the crude oil debasement, which was triggered by the failure of the Doha meeting, proved to be short-lived. The West Texas Intermediate almost completely erased Monday’s early losses as it bounced back slightly below the $40 threshold after hitting $37.61 at the opening. Similarly, the Brent crude filled the gap and returned to around $43. Gold was also buoyed this morning as it surged 0.60%. Silver was up 2.40%, platinum rose 1.20% and palladium jumped 1%. Finally, iron ore futures on the Dalian commodity exchange were up 2.40% after gapping higher at open.

In such an environment, commodity currencies were buoyed during the Asian session with AUD, NZD, NOK and CAD recovering significantly. The NZD rose the most among the G10 currencies, rising 0.79% against the US dollar. NZD/USD broke the 0.6966 resistance (high from March 31st) and held ground above the 0.70 threshold; its highest level since mid-June 2015. The Kiwi received a strong boost from the commodity rally and the improving risk sentiment, however we prefer to remain cautious as the country’s economic outlook is still uncertain as there is no clear evidence of a solid recovery.

The Australian dollar also continued to rally in overnight trading and finally broke the $0.7720 resistance to the upside. The pair is now heading towards the next resistance at 0.7849 (high from June 18th last year), and the release of the RBA’s minutes earlier this morning did not allow any room for doubt on further Aussie strength as we found no solid evidence of an easing bias in the RBA’s minutes. The Aussie should continue to ride the positive trend as commodities strengthen further; however the pair is extremely vulnerable to renewed Fed rate hike expectations and negative signals from the Chinese economy.

On the equity market, most equity indices were trading in positive territory on improving risk sentiment. Japanese shares rose the most among the Asian markets with the Nikkei 225 and the Topix index surging 3.68% and 3.25% respectively. In mainland China, the Shanghai and Shenzhen Composite rose 0.21% and 0.28% respectively. In Australia, shares jumped 1.01%, while in New Zealand the S&ZP/NZX was up 0.32%.

Peter Rosenstreich, head of market strategy: Still eye downside in USDJPY: “In a WSJ interview BoJ Governors Kuroda stated that he sees yen appreciation as a direct threat to inflations goals. Today’s comments on FX pricing were the central bank chief’s most explicit since the JPY began strengthening. Kuroda went on to provide some generic jawboning suggesting the BoJ stood ready to act, but markets reaction was muted. In our view, for Kuroda straight talking provides some insight into the panicky feeling at the BoJ. Corporate and household confidence in Abenomics is declining, which will undermine the BoJ efforts. With growing expectations of deflation, Japan is once again falling into a deflationary trap. Negative interest rates have proved less effective than originally believed (indicated by the flaws in economic theory in predicting behavioral response). Households and corporates have become worried over the sustainability of fragile inflation, which has triggered a reduction in borrowing, which in turn has strapped banks with additional reserves (hurting banks profitability). In addition, there is increased evidence that households, which were spooked by the BoJ negative rate policy reversal, are hoarding cash to avoid negative interest rate penalties. Overall, deeper negative rates are unlikely. Direct FX intervention remains a threat (sub 105 levels). Yet the BoJ must tread lightly as unsuccessful action will only erode the BoJ credibility, which is critical in policy setting. Dovish Fed and positive risk sentiment have forced the cutting of USD long positions indicating that liquidity issues with JPY repatriation will be an issue. We remain bearish on USDJPY and target range bottom at 107.63.”—

Yann Quelenn, market analyst: “Germany suffers and accuses the ECB: Tensions are rising between Germany and the ECB over the European institution’s current monetary policy. Germany believes that QEs and low interest-rates are destroying its economy and that what may be good for most of Europe is not, in the end, good for them, as they bear the brunt of the cost.

Financial markets are closely scrutinising German economic indicators and will be paying close attention to the ZEW, due to be released later today. This will provide insightful economic sentiment for April including current situation and expectation figures. ZEW Current situation data is expected to print in line with March’s previous figure. One year ago, the indicator was above 70. Economist are growing increasingly pessimistic.

However, while the overall European situation is worsening, the ZEW expectations rebounded last month but remain, as well, in a clear negative trend. In general, sentiment remains negative and the European outlook is clearly uncertain, especially due to Brexit and Grexit.

The single currency should continue to push lower against the Swiss franc. On the other hand, we remain bullish EURUSD as the renewed dovish stance of the Fed should continue to add upside pressures on the EURUSD.” —

Today traders will be watching ECB current account from the euro zone; ZEW survey from Germany (current situation expected at 50.8 and expectations at 8.0); housing starts and building permits from the US; today RBA’s governor Stevens will speak in New York and BoE Governor Carney will speak before the UK Parliament, while BoC governor will testify before the House of Commons Committee.

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Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 1

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 2

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 3

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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