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Currency market: more volatility ahead

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Kira Iukhtenko

By Kira Iukhtenko, Deputy Head of Analytical Department at FBS

Kira Iukhtenko

Kira Iukhtenko

As the year 2016 unwinds, it’s becoming clear that the financial world is still standing on a burning platform. Currency wars are gaining momentum despite the officially stated intentions to end them up. Bank of Australia joined the party in early May, unexpectedly cutting its cash rate to 1.75%. With the increased political and social risks on top, we could see much more volatility on the global markets in the coming months. So, what should investors expect from the current balance of power?

US Dollar: The Fed Ran Out of Credit

Financial markets sighed with relief after the Fed’s rate hike in December: the move was interpreted as the end of the uncertainty era. The regulator has first pledged to raise rates four times this year, but the overvalued US Dollar and global market swings in January changed the outlook. Panic reaction to the December rate move reminded of all the global risks associated with a premature policy normalization. That’s why the Fed decided to take its time.

The next FOMC meeting will take place on June 14-15. What should we expect from the regulator this time round? Some analysts interpreted the April statement as a hawkish one: it no longer includes the idea that “global economic and financial developments continue to pose risks”. However, the Fed “keeps monitoring the external threats” and “watching the economic data”. What does it mean? As for the external risks, the UK “Brexit” referendum on June 23 seems to be the biggest one these days. The Fed is very unlikely to unsettle the markets with tightening just a week before. What’s more, China still remains a pain in the neck: the latest April round of sluggish data hurt the risk appetite badly. As for the US economic data, the Fed will get the chance to appraise Q2 GDP growth only after the June meeting. The dataflow we’re seeing these days is not persuasive enough to justify a rate rise. Stakes for the Fed are too high to risk.

Broadly speaking, we find the next hike unlikely ahead of the November 8 presidential election in the United States. That’s why the odds for a June, July or September hike are remote. Barring an economic miracle happening between May and June, the next tightening step won’t be made until the Fed’s December 21 session. According to the CME FedWatch tool, probability of a hike in December is now slightly above 60 per cent – much better than the June’s 13 per cent.

How will the Fed’s inaction impact the FX market? There is potential for more US Dollar retracement in the coming months. Even if the Fed speaks hawkish in June, markets are unlikely to believe it. The central bank has gradually run out of credit.

 From the technical view, the greenback index has been trading in a consolidative mode since early 2015. Absence of Fed’s moves in June could trigger a deeper pullback towards the next support at 90 points. As a result, the EUR/USD currency pair would hit 1.2000 by the end of summer. However, in a longer term our team maintains a bullish view on the US Dollar: we expect the USD upside to renew in Q4 2016.

British Pound: Bulls Regaining Control

The UK Brexit referendum (June 23) used to be a leitmotif of the bearish GBP trade in H2 2015, but things seem to be changing. We may see how the dreams of independency are getting crushed by economic reality. OECD forecasts that leaving the EU could become too expensive for the UK economy – it could shrink by as much as 7.5% by the year 2030. With a bit more than a month left, economists now believe Great Britain will choose the “Bremain” (British remain – an opposite to British exit).

The most recent survey, which was conducted by YouGov, showed that 42 per cent of respondents supported Leave, as opposed to 41 per cent who supported Remain. Politicians are now aggressively fighting for those 13 per cent who don’t know and 4 per cent who are not planning to vote.

The UK and European governments do their best to prevent Brexit, citing dozens of economic, political, social reasons to stay. Even the US president Barack Obama has recently called Britons to vote for staying in, warning the UK-US trade agreement would be delayed for much longer in a case of Brexit. Despite the fact it won’t be Obama who decides on that trade deal, Britons find the US colleagues’ intervention quite persuasive.

Turning to the currency market, eased Brexit fears pushed the British pound to an 11-week high in early May. If global leaders continue agitating for the Bremain camp and this affects the surveys, the bullish trend in GBP will continue in the coming weeks. The cable has now faced resistance at 1.4570 – this is the trend line, connecting the Q2 2015 peaks. However, an inverse “head-and-shoulders” formation with the bottom at 1.3830 has already been confirmed by a neckline break and paves the ground for more rallies towards 1.5200 in the coming weeks.

Japanese Yen: Where Is the Limit?

Despite all the Bank of Japan’s attempts to weaken the national currency (pulling rates into the negative territory in January), yen is trading in an ascending channel since the beginning of the year. The BOJ is widely expected to ease further in the coming months, but the markets do not trust the central banks anymore. While monetary stimulus is now seen as a “new normal”, yen jumps after every no-change meeting as a spoiled kid.

What to expect from USD/JPY next? According to our forecast, the pair entered a corrective phase and is bound to decline to 100 yen in the coming months. Such a bearish view coincides with our USD expectations. Technically, this idea is confirmed by a “head-and-shoulders” pattern with a neckline at 116.50 formed in 2015. Be careful, though: as the yen comes close to the 100 waterline, the BOJ is almost certain to intervene. Analysts at Credit Agricole believe that the level of 105 yen per dollar may even be low enough.

Oil Market: New Balance

Speculation about a potential oil freeze and market rebalancing had been pushing prices higher since February: Brent crude recovered from the low of 27 dollars per barrel to 48 dollars in May. What’s next? In our view, oil price is going to enter a medium-term sideways channel in а 40-55 dollars range.

We don’t expect the production freeze to happen in the foreseeable future. The exporting countries are still trying to increase the market share – even if it hurts their local economies. Consequently, the June OPEC meeting in Vienna will likely be another non-event with many rumors surrounding it.

Despite all that, the market is now clearly setting up a new balance. Production in the US contracted by another 100,000 barrels last week; 59 shale oil companies have already gone bankrupt. According to the IEA executive director, Fatih Birol, production outside OPEC will fall dramatically this year. He expects a 700,000 barrels a day contraction that will rebalance the market by 2017 at the latest. As reported by EIA, lower oil prices had led to investment reduction of 40 per cent in 2014-2015, especially in the United States, Russia, Canada and Latin America.

Still, our moderately upbeat oil forecast could be negated by another shakeout from China. Growing expectations for a Fed’s hike could wake the sleeping Chinese dragon once again – just once of those things we’ve seen in August 2015 and January 2016.

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Trial by fire: Why 2020 experience will help the FX industry in 2021

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Trial by fire: Why 2020 experience will help the FX industry in 2021 1

By Vikas Srivastava, Chief Revenue Officer at Integral

I think I can say with confidence that 2020 has been the strangest year in my career to date. The FX markets have faced their fair share of geopolitical disruptions over the decades, yet nothing comes close to the impact of COVID-19.  While we are not out of the woods yet, there are reasons to be optimistic about 2021.

As with many other industries, the last ten months has created the necessary conditions for innovation in FX by accelerating existing trends. Due to enforced lockdowns and distributed workforces, we now have many buy and sell-side institutions undertaking a greater proportion of electronic and algorithmic trading, automated workflows, and off-premise solutions. These trends are gaining pace, ensuring the FX industry has not simply coped but adopted and overcome during these difficult conditions.

It’s a good thing the market is in a position of quiet confidence as 2021 will not be a walk in the park. Along with contending with a low-rate environment and geopolitical uncertainty, new regulations will be introduced for the first time or as part of previous phases that were postponed due to the pandemic. Both SA-CCR and phase 5 of the uncleared margin rules (UMR) introduce greater cost implications for certain trades and introduce new headaches for OTC markets in particular.

With unavoidable events appearing on the horizon, institutions need to assess their technology to ensure they can continue supporting their clients irrespective of where we are working and the market conditions surrounding us. Cloud technology that is fast-to-implement and offers highly customizable features will allow institutions to keep up with accelerating trends and offer bespoke solutions to clients, all at significantly lower cost and without the need to compromise on quality.

Having learnt the lessons of the last year, the FX industry is in a strong position to push on again in 2021. To do so successfully, firms will need to maintain their ambition in innovating and introducing cost and operationally efficient technology. Those that do can fly high up in the clouds – no pun intended.

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Capital Markets: The Last Frontier for Digital Transformation in Financial Services

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Capital Markets: The Last Frontier for Digital Transformation in Financial Services 2

By Dr. Avtar Singh Sehra, CEO, Nivaura

The last decade has seen financial services undergo vast digital transformation. New technologies and a greater ability to digitise and automate processes have brought greater efficiency and effectiveness to the sector, as well as enabling the creation of new, value-added consumer and B2B products.

Capital markets, however, remain largely unchanged. The industry is constrained by legacy processes that often involve substantial manual data input and document/spreadsheet management, which is inefficient in comparison to digital and automated operations. These inefficiencies have been squeezing capital market participants’ margins for far too long.

The current state of affairs

As it stands, a typical primary capital markets execution is a linear and sequential process involving multiple stakeholders, who repeatedly convey information back and forth manually to draft and execute legal documents, and then manage data input into multiple systems. This data is then sent across multiple institutions across the transaction lifecycle from pre-trade to post-trade, where it is again extracted and transformed to perform further lifecycle management activities. The processes that occur after drafting relevant documentation, such as clearing and record-keeping, are also manual and time consuming, with parties having to review documents individually.

There are some exceptions to this. For example, within commercial paper and certificates of deposit, there is some level of automation in how deals are executed, and data is transmitted from a dealer into post trade processes. In addition, high volume, structured, self-led transactions may be standardised to some degree. However, even with these isolated islands of partial automation, the general debt capital markets (DCM) issuance process remains highly manual and is in desperate need of digitisation and automation to increase its effectiveness and efficiency.

Not only do these repeated manual processes require significant human resources, but they are also prone to error. Humans, for all our gifts compared to machines, will never be able to achieve consistent 100% accuracy when it comes to complex data and document management processes. However, before we can even begin to discuss automating manual activities, they must first be digitised. This is crucial because it enables the capture of structured data throughout the transaction lifecycle. Only structured data can be easily leveraged for advanced automation, from simple if-then logic, to advanced machine learning technologies for complex cognitive decision making e.g., extracting data from complex documents.

Considering the evolution that the rest of the financial sector has undergone over the last twenty years when it comes to digitisation and automation, it’s hard to understand why capital markets have been left behind until now. But change is finally coming.

A turning point

2020 saw the winds of change begin to blow across the capital markets industry. In a first for the sector, a group representing all participants of primary capital market transactions is collaborating on a data standard to be used in legal documents as well as down-stream systems and transactions data flow: General-purpose Legal Mark-up Language (GLML). This collaboration is taking place under the umbrella of the GLML Consortium, whose founding members include magic circle law firms and capital markets infrastructure technology vendors.

GLML is a ‘mark-up language’: a type of human and machine-readable syntax developed to be easy for a lawyer (or, indeed, anyone else) to implement in documentation with little training, and without requiring coding experience. It enables users to easily turn their existing contractual templates, including precedents and pro formas, into machine readable files, which can then be used to create transactions with structured data from the outset that can map to a standardized taxonomy for transmission across the pre- or post-trade process. Any word processor or editor (including Microsoft Word) can be used to apply GLML, allowing drafters to create and maintain “GLML’d” templates in the same way they approach traditional documentation.

Fundamentally, GLML permits the accurate extraction of key data from legal documentation, allowing it to be passed to relevant intermediaries in a standard and automated and seamless manner.

The wider implications of GLML

At first glance, it’s easy to underestimate the impact that a standard like GLML could have on the capital markets industry, but enormous benefits come from what it will enable.

First, GLML enables the accurate creation of structured data, which is usually produced and executed in an unstructured way in debt capital markets transactions. GLML therefore allows data to be passed between relevant transaction participants and financial market infrastructures automatically and seamlessly, and thus easily mapped to other formats. This alone will make capital markets workflows much more efficient, increasing profit margins and freeing up human resources to focus on value-add tasks and projects. Furthermore, as the volume of structured data increases, we gain further capabilities to enable increasing automation using AI tools.

Second, GLML enables capital markets participants, from dealers and borrowers to lawyers, to communicate easily, and collaborate throughout the capital raising process on digital platforms. This again reduces human error caused by data input, extraction and transformation.

Third, but perhaps most importantly, is that GLML as an open standard drives expansion of the ecosystem and enables innovation. For example, if one were to invest in digitising and automating all their capital markets documents through “low-code” or “no-code” tools, they would be locked into one vendor’s tools and standards. This means that, as the industry changes and new services emerge, or if you simply want to convert generated data to other formats, significant further effort is required. This slows down adoption of such tools and makes communication and interactions between multiple parties more challenging.

It is accepted that a lack of standards creates friction in a market, which limits interaction, flexibility, agility and innovation. One of the most obvious examples of this is seen in the emergence of the World Wide Web, which is underpinned by HTTP/HTML and led to the explosive adoption of the internet in the 90s. We can even go further back than this, where the lack of “standard”, or, more accurately, lack of a common railway gauge (rail width), led to significant challenges in the early railways. When a line of one gauge met a line of a different gauge, trains couldn’t run through without some form of conversion, which would normally lead to passengers having to change trains. This resulted in significant delays, inconvenience and cost. Widespread adoption of railways globally did not come until a standard gauge was created.

GLML will achieve for capital markets what HTTP did for the internet. It will support the simplification and ultimately democratisation of capital markets, ensuring the demand for capital can be efficiently and effectively connected to the supply.

GLML, as an open data standard, is the first step to digitising and automating the lifecycle of the issuance process. Today, capital markets processes are outdated, leading to vast and unnecessary cost and risk. Evolution is both essential and inevitable and, driven by GLML, 2021 will be the year that the debt capital markets transform for good as the industry converges around a common standard.

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Gold-i Integrates with CryptoCortex

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Has Cryptocurrency become the new digital gold?

Gold-i has integrated with CryptoCortex – an advanced digital asset trading platform from EPAM Systems, a leading global provider of digital platform engineering and development services. This provides financial institutions with increased access to multiple market makers and fully cleared cryptocurrency products available via Gold-i’s CryptoSwitch 2.0™, part of its Matrix multi-asset liquidity management platform.

The integration was completed following a request from a Gold-i client wanting to use the CryptoCortex platform to access liquidity from Hehmeyer and Shift Markets via Gold-i’s CryptoSwitch 2.0™.

Tom Higgins, CEO, Gold-i comments, “As digital asset trading continues to gain momentum amongst brokers, Prime of Primes and hedge funds, a key part of our strategy is to ensure that the cryptocurrency liquidity available through Gold-i’s liquidity management platform is easily accessible, regardless of which trading platform clients are using. CryptoCortex is one of the most advanced platforms for digital asset trading, therefore integrating with them was a logical step for Gold-i.”

“We are delighted to partner with Gold-i to provide our customers with real-time, event-driven processing and analytics that not only meets their essential needs but also delivers actionable intelligence,” said Ilya Gorelik, VP, Real-Time Computing Lab at EPAM. “Financial markets are among the fastest moving markets around, and with cutting edge tools – like CryptoCortex – that make data readily available, customers can quickly implement the best decisions possible.”

CryptoCortex is the most advanced institutional cryptocurrency trading platform on the market, providing a complete 360-degree solution for brokers/dealers, exchanges and buy-side trading firms. It has been developed by Deltix (now EPAM Systems), based on over 10 years’ experience in building, deploying and supporting institutional-grade intelligent trading across equities, futures, options, forex and fixed income.

Gold-i Matrix offers multiple routing and aggregation methods, leveraging connections with over 70 Liquidity Providers. It is super-fast and highly flexible, helping financial institutions worldwide to make more money and reduce risk.  It supports FX, CFDs and cryptocurrencies in a single solution which is fully compatible with the Gold-i Crypto Switch. Crypto Switch™ 2.0, provides brokers worldwide with a fully cleared cryptocurrency product and a cost-effective, efficient means of accessing multiple cryptocurrency market makers who can provide deep pools of liquidity as a CFD or physical asset. For further information, visit www.gold-i.com.

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