By Elizaveta Belugina, leading analyst at FBS Markets Inc., FXBAZOOKA.com
The current financial system invites so-called ‘currency wars’ between different nations: during the times of economic hardships governments seek to devalue national currencies in order to make their exports more price competitive. Once several players join the game, it provokes a chain reaction: countries which didn’t take part in the battle at first, have to join the fight as their currencies become too expensive compared to those of their neighbors – a very unpleasant thing for export-oriented economies.
As all parties are contending with the same ammunition but for contradictory goals – namely their own well-being at the expense of others – it raises an important question: who will win in this currency confrontation? Can it be that everyone wins? And are there winners at all?
The sheer fact that regulators all over the world keep easing monetary policy means that the existing measures are not enough: the economies suffer, so there’s a need for additional stimulus. Some economists even don’t rule out the possibility of QE4 in the United States.
Monetary easing – both conventional and unconventional – is a real mayhem these days. Here’s the list of the central banks which lowered the benchmark interest rates since the beginning of 2015: Romania (4), India (3), Switzerland, Egypt, Peru, Denmark, Turkey (2), Canada, Pakistan (3), Albania, Russia (4), Australia (2), Sweden (2), Indonesia, Israel, China (4), Poland, Thailand (2), South Korea (2), Serbia (4), Hungary (4), Sri Lanka, New Zealand, and Norway – the list is quite impressive. All in all, since Lehman Brothers collapse central banks have lowered interest rates more than 570 times. The European Central Bank has resisted monetary stimulus for a long time, but eventually even Mario Draghi had to give green light to the quantitative easing (QE).
Let’s have a look at some countries’ Real Effective Exchange Rates (REER), which provide a measure of their export competitiveness: a rise in the index implies a fall in competitiveness, and vice versa.
As you may see from the chart above, quantitative easing helped to increase the US competitiveness in 2009-2011. However, as the Federal Reserve ended the third round of asset purchase program in 2014, US dollar’s REER went up. This represents a negative factor for American economy showing the most dangerous thing about the loose monetary policy: once you start it, it’s very difficult to turn it off, because the economy, the stock market and practically everyone become too used to the cheap money. This addition not only creates an ever-present risk of uncoiling inflation, but also raises a vicious circle of constant easing and currency wars.
If there are winners, there should be losers. As one currency weakens, other currencies inevitably rise. It’s evident that hot money poured out of the US to emerging market economies like Brazil making its national currency appreciate. That’s why the country had a huge loss of competitiveness during the same period. Big monetary inflow made asset and food prices in Brazil rise magnifying inflation. Even now high inflation prevents Brazil from joining other central banks in cutting interest rates with full force. And when the US finally raises interest rates, it will cause more of the violent capital flows, but in other direction, and it won’t be pretty.
It’s clear that the world’s financial system requires more and more monetary stimulus. Central banks cut interest rates and buy their own governments’ bonds in order to print extra money and hold interest rates at the record lows thus stimulating demand and investment. Moreover, weaker national currencies help to devalue huge public debts. All in all, the aim itself is good, but the road to hell is paved with good intentions. The problem is that QE increases exchange rate volatility. As a result, international companies have to hedge more, and the cost of cross border transactions rises. Foreign direct investment also suffers, and financing becomes more expensive for countries with current account deficits. Excessive expenses are a burden for economic growth. All in all, the state of currency wars complicates co-operation of economic and trade partners creating barriers in their way.
Aren’t there other ways to encourage economic growth other than the loose monetary policy? Of course, there are. But quantitative easing offers quicker results. As most advanced economies suffer from low inflation and subdued economic growth, it’s natural for their central banks to conduct loose monetary policy which is debasing the currencies. What the nations don’t realize is that they are singing a deal with the Devil and that it will be very difficult to get off the hook.
To sum up, in the short-term there are some winners and losers of currency wars: countries which manage to achieve acceleration in growth, and countries which are hurt because their competitors have made their own exports cheaper. In the long term quantitative easing causes plenty of problems for everyone. So far what we have seen is that one round of currency war provokes the next one.
According to Josef Stiglitz, currency wars have no winners. The gains of a county which is devaluing its currency look smaller than the losses of the other countries which are hit by the consequences of such policy. As all nations are tied up together in the globalized word, these small gains tend to evaporate with time as countries suffer from the troubles of their partners. This wise economist warns that in 1930s policies aimed to hurt the neighboring countries made the Great Depression last longer. Stiglitz offers an alternative way –global co-operation based on structural reforms, economic stimulus and long-term institutional changes in the global monetary system. The US as the owner of the world’s main reserve currency and the originator of currency wars in the first place should play the leading role in making the various nations cease monetary fire. To establish the currency peace America has to demonstrate a positive example by pioneering high productivity investments and wage increases. This is not the easiest way, and it will take time before the policymakers finally realize that this is the best solution. Until then currency wars will keep rocking the world economy preventing it from sustainable growth.
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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