May 17, 2016

Bracing for Brexit: FX Market Impact, Commodities Update

In this video blog Udi Sela, VP of Business Development at Numerix and Jim Jockle, CMO discuss a potential Brexit, aka whether the UK may leave the EU. They examine current controversy surrounding Brexit, including the political debate and from a market perspective how it may impact foreign exchange markets as well as commodities.

VIDEO TRANSCRIPT

Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. 60 days is the magic number and no not the Rio Olympics, but the impending Brexit. Joining me today to discuss the developments as they occur is Vice President of Business Development here at Numerix, for EMEA, Udi Sela. Udi, how are you sir?

Udi Sela (Guest): Excellent. Great to be here again Jim, Thank you.  

Jockle: Thank you, Udi. Now the Sterling has hit an 18-month low against the Euro, in advance of a potential Brexit. First question to you, how are corporates, as well as other institutions, thinking about hedging against potential risk against the market?

Sela: Jim, that’s a very good question because we have seen that the volatility on the Sterling has indeed risen a few notches since the announcement of David Cameron (of the referendum) and this could imply two things. One thing is that investors are actually putting new positions on the trading book. And then, of course, British business people need to hedge the currency risk which most likely would be, the   weakening of the pound.

Jockle: So, a lot of controversy around London from a political standpoint this week as well. Obviously David Cameron doesn’t want to see the Brexit. But yet, the London political scene with the election of a new mayor is creating some questionable unrest as it relates to the global economy and how things will play out. From an FX perspective, what should investors be thinking about as it relates to some of this volatility and are there any strategies that would be typical in this type of evolving environment.

Sela: Yes, so a couple of interesting things to say about that. So as we said earlier, probably the risk to hedge is the weakening of the sterling. So that means that as an exports to rise so you receive dollars and then you need to convert them to pounds. So basically for export it’s probably a good thing, but when you’re importing into Britain, then your purchasing power decreases. Let’s take commodities, like oil, the UK is not rich in that resource, that’s going to be an issue (as in GBP terms, the commodities will become more expensive).  

Jockle: Let’s turn to oil for just a second. Obviously a little bit of a rebound and also recent concerns about all the fires in Canada now that have been threatening some of the production numbers. What’s the near term outlook?

Sela: Yeah, there are a few factors supporting oil prices at the current levels (around $45 to a barrel). So it seems that most of the producers or the bigger ones have agreed on establishing a floor price to oil (by setting production quotas.  And of course you mentioned Canada, so I think it’s a few million barrels a day which are now off the market. And there is also a slowdown in China, you may have seen that both imports and exports have declined. Therefore, the need for oil is not as it was, and that reduces the demand a bit. So it’s not just about the offer, but also the demand which is weakening a bit and also with the general state of the economy.  

Jockle: So as we’re rolling to the end of 2Q here in the beginning of May, what are some of the key indicators you’re thinking about, amid this unrest right now?

Sela: So clearly we mentioned the price of an oil barrel; something you’re definitely looking at. I keep looking at the yields. I see that, for instance, the 10 year US government bond yield rate is around 1.84%, so it doesn’t really manage to break the 2%. So, if you like, the US curve is still pretty flat. We spoke about the Brexit, I’m looking at the Gilt which is currently trading at 1.4%, as opposed to the dollar 10 year GB, the spread is like 40 basis points You know, we mentioned commodities in a few of our recent video blogs, so if you look Sat currencies of commodity driven economies, like Australia, such as the Australian dollar, we note a slowdown and weakening currencies. In Australia, they just got rates lowered last week (to try and boost the Australian economy) and basically the inflation there is historically low. It seems like we’re just stuck in this cycle of very low inflation, so that’s really what I look at because I think the indicator for coming out of the woods would be rising inflation.

Jockle: Well, Udi I want to thank you so much. And of course for all the fans of the Numerix Video blog, why don’t you shoot me an email; for the first five emails I get, I’ll make sure you get a nice, little sporty, Numerix hat. Udi thank you so much for joining us; again we want to talk about the topics that you want to talk about, follow us on LinkedIn or on Twitter @nxanalytics, Udi we’ll talk to you next time. Thank you.

 

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