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USD LOWERS AS COMMODITY PRICES RISE, RUSSIA GAINS SOME POSITIVE MOMENTUM

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USD LOWERS AS COMMODITY PRICES RISE, RUSSIA GAINS SOME POSITIVE MOMENTUM
  • We still believe that there is some upside potential for crude oil prices, although it would be difficult to break the $60 level given the elevated amount of inventories
  • USD/NOK is expected to continue to move lower as the NOK will find a strong support from rising oil prices, while the USD should retreat as the market starts to price out a June rate hike
  • Precious metals are also taking advantage of the weaker dollar and gold should start recovering ($1,200 – $1,300 – next price targets)
  • Although a stronger ruble should weaken nominal wage growth, Russia’s Central Bank will intervene to avoid the ruble gaining too much in order to protect its GDP
  • The recent oil rebound is without doubt bolstering Russia’s economy, which is heavily dependent on this commodity
  • The Russian central bank’s target of $500 million in gold and forex reserves is getting closer and currently stands in the region of $390 million
  • Russia plans to gain more credibility by remove the dollar from its international exchanges. This would also offer Russia some protection against global uncertainties.

In Australia, private capital expenditure (capex) contracted 5.2%q/q in the first quarter of 2016, missing consensus for a smaller decrease of -3.5% and also below the upwardly revised figure of +1.8% in the last quarter of 2015. On a year-over-year basis capex contracted -15.4% as spending on equipment, plants and machinery slid 9.2%y/y (s.a.), while spending on buildings and structures collapsed 18.8%y/y (s.a.). Initially, AUD/USD fell sharply on the news as it hit 0.7162. However, the Aussie bounced back above the 0.72 threshold, supported by rising commodity prices. Crude oil continued to rally hard on the back of fading supply glut issues as US stockpiles dropped 4.2k over the last week, missing the forecast for a smaller reduction of 2k barrels. In London, futures rose 0.70% to $50.09 a barrel, while US futures stumbled on the $50 threshold, stabilising at around $49.90 a barrel. We still believe that there is some upside potential for crude oil prices; however it would be difficult to break the $60 level given the elevated amount of inventories.

With crude oil prices moving higher, the Norwegian krone followed the trend. USD/NOK slid 0.70% to 8.3070 after hitting 8.4065 amid growing Fed expectations for normalising short-term rates. We expect the currency pair to continue moving lower as the NOK will find a strong support from rising oil prices, while the USD should retreat as the market starts to price out a June rate hike.

Precious metals are also taking advantage of the weaker dollar as the yellow metal rose 0.39% in Tokyo. Silver was up 0.72%, while platinum jumped 1.54% and palladium surged 2.05%. Gold has reached the bottom of its medium-term range and should therefore start recovering. A strong support can be found at around the $1,200-$1,220 area, while the top of the range is at $1,300.

In the equity market, Asian regional markets were mostly trading in positive territory. In mainland China, the Shanghai and Shenzhen Composites were up 0.13% and 0.31% respectively. In Japan, the popular Nikkei 225 edged up 0.09%, while the Topix index remained unchanged. Offshore, Hong Kong’s Hang Seng edged down 0.04% and Taiwan’s TWSE traded flat (-0.02%). In Europe, equity futures are once again trading in negative territory – just like yesterday – but may turn positive following Asia’s lead. US futures are mixed.

Yann Quelenn, market analyst: Russia, gaining positive momentum: “According to a recent survey of 37 economists, the Russian economy should shrink by 1% in 2016 vs. a previously expected contraction of 2%. The recent oil rebound is undoubtedly helping the country, which is heavily dependent on this commodity. A barrel of Brent is now above 50 dollars a barrel, representing a 7-month high. The survey also indicates that inflation should remain high, around 8% y/y. Nominal wage growth has surged since the start of the year, which is adding upside pressures on consumer spending. We believe that this is a direct effect of a very weak rubble, however a newly strengthened ruble should weaken nominal wage growth. We also believe that the Russian central bank may intervene in the event of the ruble gaining too much in order to avoid damaging its GDP. Later today, Russia will disclose its gold and forex reserves for the week ending May 20. Russia’s goal of reaching $500 million is getting closer with current reserves amounting to $390 million. Russia plans to remove the dollar, as much as possible, from its international exchanges in order to gain more credibility. This would also afford Russia a certain degree of protection against global uncertainties.”—

Today traders are awaiting a final reading of Spain’s GDP figures for Q1; industrial output from Switzerland; PPI from Sweden; initial jobless claims, durable goods orders and pending home sales from the US; gold and forex reserves from Russia.

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What we can expect from currencies and markets in 2021

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What we can expect from currencies and markets in 2021 1

By Jeremy Thomson-Cook, Chief Economist at money management specialist Equals Money, part of the Equals Group.

2020 was a year that changed almost every aspect of our lives, and currency markets across the world reacted with volatility. Complacency, panic, and isolation have influenced activity over the last 12 months and most recently, a semblance of hope has been seen as vaccines offer the first glimpse of a ‘way out’.

While 2021 will hopefully see us on the road to recovery, we’re certain to be dealing with the longer-term economic effects of the pandemic for years to come, while also navigating a post-Brexit outlook. So, what can we expect from currencies and markets in 2021?

A focus on recovery

Once the impact of mass-vaccination starts to be seen across the world, we expect to see a huge focus on recovery this year.

Investors are expected to move away from considering the US dollar and wider developed markets as the best place for their money, with an increased interest in emerging markets. Commodity prices are likely to remain high as demand recovers and the global supply chain gains pace due to growing confidence from consumers to spend their cash.

Successful logistics will play a pivotal role on the road to recovery, with the ability of governments to both reliably and speedily vaccinate the population while driving the global economy from a trade point of view, essential for success.

All this is underpinned by the assumption that interest rates will remaining at ultra-low levels throughout this year, and in certain cases, longer still.

Sector-specific expectations

When it comes to sector-specific recovery, the travel, airline, and leisure industries are expected to make a strong comeback when restrictions ease as consumers look to make up for lost time.

By contrast, commercial property and real estate are likely to face challenges as businesses revaluate how they use office space after nearly a year of successful remote working. This struggle will also be reflected by the increasing amount of empty retail space on British highstreets after the sector, and some of Britain’s most established brands, were hit hard in 2020.

What will we see from currencies across the globe?

GBP

The pound is reacting to a UK economy still very much in the grips of a pandemic, with strict lockdown measures likely to be in place until at least March. Add to that a new relationship with the European Union, and we’re likely to see the pound underperform in 2021, particularly against the euro.

Politics is likely to have less sway over sterling in 2021, with the exception of the upcoming elections in Scotland which are likely to raise the chances of another Sottish referendum on independence.

Despite the expectation that the pound will have a modest year, we do expect to see it move higher against the US dollar in the coming months.

Euro

All signs point to a strong start for the euro, and we expect it will continue the strength it showed at the end of 2020 for the months to come. Its counterparts in Scandinavia (NOK, SEK) and in Central and Eastern Europe (PLN, HUF) may even outperform the single currency as the Eurozone recovery outpaces the US and UK’s.

Markets are pleased that the Eurozone has managed to come together during a time of crisis and offer businesses and consumers both fiscal and monetary policy support. The political agenda looks a lot quieter for 2021, and this lack of political pressure coupled with a central bank that has shown its strength through the Pandemic Emergency Purchase Program, means sovereign risk is very low.

US dollar

The US dollar is likely to remain weak as investors who have bought into the dollar during Trump’s tenure in the White House react to the transition to a Biden Administration – a change that is likely to normalise global trade and expand spending.

US businesses have struggled with international relations under the watch of a Trump administration and a calmer stewardship of trade should help to boost corporate profits in the coming months, allowing for further USD depreciation.

If the UK, Asia or the Eurozone are able to move forward with their pandemic recovery faster than the US, we expect the dollar to lag against both GBP and EUR, as well as other emerging currencies – the Chinese yuan, Russian ruble and Indonesian rupiah – in 2021.

Japanese yen

The Japanese yen has acted as a safe haven from negative investment sentiment throughout the Covid-19 pandemic, and arguably long before that, pushing higher against other currencies in 2020.

While the yen would typically be sold off by investors in favour of more attractive investments, the overall outlook becomes more positive as it continues to show strength as we enter 2021. This could be down to the strange markets that we are currently navigating; vaccine joy tempered by very real near-term pandemic problems. Investors may also be positioning themselves for a wider retreat in the US dollar (USD).

Whilst the Japanese yen may enjoy some strength against the USD in the coming year and remains one to watch, we expect it to slip on a broader basis.

Australian dollar

The Australian dollar has acted as a poster child for the recovery in risk assets since the early days of the pandemic, and its likely to remain ahead of its counterparts for the early part of the year.

Australia’s handling of the pandemic to date gives it an advantage over the likes of the UK and US, and as it enters the summer months with a vaccine rollout all but underway, the outlook is positive.

If market minds are focused on a recovery then we will be looking for a higher AUD, and it is not out of the realms of possibility that it could outperform the majority of the G10.

If 2020 taught us anything, it’s that nothing’s set in stone and as we start the new year in another lockdown, it looks like that’s set to continue for 2021. Either way, we’ll see the uncertainty of the world we live in continue to be reflected in the market and currency activity across the globe.

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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 2

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 3

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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