Skrill’s FX account manager, Alexander Dando, explains how digital payments are expanding the Forex market and how struggling economies can help increase profits.
Once, Forex was a world only for professional executives, who knew the trading markets inside out, predicting future fluctuations and dips weeks in advance. And because of slow bank transfers they needed to know what the market was doing ahead of time, as trades took three to five days. Forex is now open to any individual without the need for huge sums of money to be available instantly.
This is mainly due to the internet. Forex is the most liquid market in the world and is also the most volatile. Scheduled announcements, like the UK budget or the US nonfarm payroll data, or unforeseen global events such as conflicts and natural disasters are all events traders need to be constantly aware of. Knowing the information as it happens and being able to react to this information allows traders to position their trades effectively. Waiting to hear this kind of information on the evening news means you have missed your chance; so online news updates present a new way to keep up to date with unfolding trends.
There are some traditional Forex brokers who still rely on bank wire transfers, but today’s traders who are reacting to up to the minute news are often unsatisfied with a 12-hour delay to a card-funded deposit.
That’s why digital payments such as digital wallets and instant transfer methods are re-painting the landscape of traders’ habits and preferences. There is more to these options other than additional security and speed – wallets, for example, offering cash back on customer deposits, unique offers for deposit bonuses and greater control over monetary flow.
For the past four years, foreign exchange volume has tripled to £4 trillion per day, and we expect to see this continue to grow. Although, retail Forex constitutes a very small percentage of this volume, it is rapidly building its share with more platforms offering those customers, who once never had the opportunity to trade the market, the chance to do so.
However, you need to know how the markets work. Take the economic trouble in Cyprus and the struggling Euro; a savvy Forex trader will know volatile markets offer the best opportunity to make profits. Anticipating the extent to which the news from Cyprus will have an impact on the strength or weakening of the Euro, for example, allows a trader to start planning their next investment decision, and this has been reflected clearly by our own Forex customers depositing significantly into our partner platforms the week the crisis was first reported.
Traditionally many Forex brokers have set up business in Cyprus due to the beneficial tax and banking arrangements, a trend we expect to see reduce in light of the recent economic problems.
Compliance and regulation is also an ever-increasing challenge in the Forex industry. It was once a loose and broadly unregulated industry but there has been increasing movement of brokers towards Cyprus and London to gain FSA and CySEC regulatory status.
Changes in the last few years have seen the SEC in the US requiring a Forex broker to have $20 million in liquidity before they are considered for a brokerage licence and Swiss entities require Forex companies to have banking licences, which has made these markets harder than ever to enter.
Even changes in the payment landscape is seeing companies, once safe in offshore regions, now restricted from taking card payments with Visa and MasterCard, which has significantly altered the way we work with our Forex partners, and this is a trend we see only getting more highly regulated. Ultimately, increased regulation goes to improve customer safety, adding assurances to online traders, which can only be a good thing.
With greater investment into trading platforms across the world, we are expecting to see increased participation across emerging markets and ever more aggressive margins. Enabling payments is core to our business and the service we provide to our Forex partners, and we are also seeing a trend towards low-cost, instant ways for traders to make deposits, and react quickly to market news as soon as they receive it. Hence the reason why a tendency towards instant bank transfers options and, indeed, the Skrill Digital Wallet are seeing significant growth in this sector.
Surprisingly, developing countries can be more advanced in terms of technology and payments than much of the developed world. It is because they have leapfrogged outmoded methods – desktop PCs and credit cards have barely had a chance to penetrate these markets – before smartphones and digital wallets became available.
So far, Forex platforms are mobile-ready – in both respect to platform functionality and deposit-taking ability – and there are few barriers to entry. Clearly though the issue still lies in customers having the opportunity to learn how to trade in an effective manner, and in this area where an issue lies there is also an opportunity.
Cards and traditional bank transfers are tried and tested, though a lack of innovative incentives and difficulties with mobile and tablet compatibility are causing their share to fall and for digital and alternative payments to take their place.
Barclays announces new trade finance platform for corporate clients
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.”
What’s the current deal with commodities trading?
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.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
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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