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US YIELDS DRAG THE DOLLAR DOWN, NZD ON THE RISE, THE STERLING TO CONTINUE ITS FREEFALL

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US YIELDS DRAG THE DOLLAR DOWN, NZD ON THE RISE, THE STERLING TO CONTINUE ITS FREEFALL

By Arnaud Masset, market analyst at Swissquote Bank

  • USD struggling to gain positive momentum over the last month and now further losses cannot be ruled out as the world’s biggest economy tries to convince the markets that everything is fine
  • A weak USD will allow riskier currencies to continue appreciating although central banks across the globe still have some fire power and are determined to prevent further appreciation of their local currencies
  • NZ: Given recent USD weakness, the RBNZ will have to release an extremely dovish statement in addition to a rate cut if Governor Wheeler hopes to bring the Kiwi to more competitive levels
  • Ahead of tonight’s interest rate decision, the risk is definitely on the upside for the Kiwi as a very dovish statement will be required to prevent the Kiwi from resuming its rally
  • The cable is heading lower, towards 1.3000 and will continue to head south

The US dollar lost ground against all major peers on Wednesday as US treasury yields dropped amid fading expectations for a Fed rate hike. In the wake of the strong NFP report, the probability of a rate hike in September – extracted from the Fed fund futures – currently stands at (only) 26%, while the probability of a move before year-end flirts with the 50% threshold, suggesting that the market is giving up the idea of tightening in 2016. The monetary policy sensitive 2-year treasury yields slid to 0.6980%, down 4bps compared to post-NFPs levels. Consequently, the greenback was trading lower across the board, losing as much as 0.60% against the New Zealand dollar and 0.55% against the Japanese yen. The dollar index was down 0.40% overnight, completely reversing the gains made on the back of last Friday’s strong NFPs. The USD has been struggling to gain positive momentum over the last month and now it seems that further losses cannot be ruled out as the world’s biggest economy is struggling to convince markets that everything is fine. The weak USD will allow riskier currencies to continue appreciating; however central banks across the globe still have some fire power left and are determined to prevent further appreciation of their local currency. Competitiveness first!

The New Zealand dollar accelerated in overnight trading reaching 0.7228 against the US dollar in spite of an expected upcoming rate cut by the RBNZ no later than tomorrow morning. Given the recent USD weakness, the RBNZ will have to release, in addition to a rate cut an extremely dovish statement if Governor Wheeler wants to bring the Kiwi to levels considered as competitive by the RBNZ. Since Monday, the Kiwi has risen as much as 2% against the greenback, completely erasing the losses made on the back of the US jobs report. Ahead of tonight’s interest rate decision, the risk is definitely on the upside for the Kiwi as a very dovish statement will be required to prevent the Kiwi to resume its rally. NZD/USD moved back below the 0.7182 resistance implied by the 61.8% Fibonacci line on July debasement.

YannQuelenn, market analyst: “Sterling to continue its freefall: The cable is heading lower towards 1.3000 and for the second time since the Brexit vote, this level has been broken. In our view, this freefall will only continue but this is definitely not only due to the Brexit vote. Last week, BoE Governor Mark Carney announced that the rate cut was triggered by the potential downturn implied by the result of the 23rd of June referendum. We found this statement misleading. Essentially, we believe that the BoE is simply trying to save the GDP while it is in a complete free-fall. 2017 GDP forecasts have been slashed to 0.8% from 2.3%.

UK total debt was around CHF 2 trillion at the end of 2015 and servicing this debt costs around 3% of the GDP each year. But in this era of lowering interest rates, and declining growth, the cost of debt is growing, making it increasingly difficult to pay back. This is the real reason why Mark Carney cut the rate and announced the massive expansion of the BoE’s asset-purchase program to 425 billion pounds.

The BoE is just like any other major central bank in that “free money” reigns supreme. The Fed is now the only remaining central bank to announce a rate hike decision, the S&P 500 is at an all-time high but the Fed is afraid to raise rates by 25 basis points. All central banks act together and use the same monetary policy. The Fed is no different.” —

In the equity market, it is a day for profit taking as most equity indices are blinking red across the screen. In Asia, mainland Chinese shares edged lower with the Shanghai and Shenzhen Composites falling 0.20% and 0.13% respectively. In Japan, the Nikkei was down 0.18%, while in Singapore the STI edged up 0.03%. Offshore, Taiwan’s Taiex was up 0.50%, while in Hong Kong’s Hang Seng edged down 0.08%. European equity futures were no exception and followed the Asian lead in negative territory.

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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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