+

Implication of Brexit for

the currency market.
By Sheena Nazareno
+
The Brexit Basics

 the EU Referendum – national ballot to determine the vote for the

British exit from the European Union

 Polls open at 7:00 AM on Thursday, June 23rd; close at 10:00 PM.

Vote tally expected sometime midday Asia Session Friday.

 With a split in one of the world’s collective economies, the

markets are on high alert.
 The fear of fallout following a disorderly outcome arises as much from
the unstable conditions fostered by the reach for risk and the moral
hazard in monetary policy
 casting a long shadow over the entire financial system.
+
Past & Present Market Conditions
 Brexit brings unprecedented market circumstances.

 Comparable to 1) the Scottish Referendum 2013 and

2) the UK General Election 2015

 Similar fundamental influence and market anticipation

 Increased level of anxiety and uncertainty, no clear grip on full range of risks
 The tallies stoked dramatic GBP/USD volatility
 Transitioning from rate speculation surrounding BoE intentions to concern
over economic stability.
 Activity that followed the events settled rather quickly with a distinct
reminisce of unease.
+
Past Market Conditions
Liquidity gaps & market dislocations
+
Past Market Conditions
Increased volatility
+
Past Market Conditions
Surges and abrupt trend changes
+
Past Market Conditions
Increased volatility and strong pound rally after results
+
Present Market Conditions
The EU Referendum Vote: Brexit
+
Present Market Conditions
The EU Referendum Vote: Brexit
+
Present Market Conditions
EU Referendum Vote: Brexit

 “the biggest risk to domestic financial stability.” -BoE

 The short-term impact of Brexit is likely to be negative.

 Economic Uncertainty
 High-financial volatility

 The disorderly movement of markets and subsequent volatility

 results from the interbanks becoming uncertain of the events.
 banks become risk averse and less aggressive on the pricing, or
perhaps pull their available liquidity altogether.
 as the interbank marketplace dries up, any transactions taking place
could be many pips away from the previous pricing level.
+
Present Market Conditions
EU Referendum Vote: Brexit

 market participants speculating about the viability of the Euro

 over the long-term

 USD/CAD fell nearly across the board this week as

Commodity-FX

 Gold Prices rallied for a third consecutive week with the

precious metal up more than 1.25% ahead of the New York
close on Friday.

 potential market movers for the Australian Dollar, safe-haven

US dollar and other crypto currency such as Bitcoin
+ Implication on currency markets:
1) High financial volatility
 On June 13, GBP/EUR volatility soared to historic 26%
 more than the previous all-time high of around 25%, reached during
the global financial crisis.

 Bloomberg survey:
 sterling to drop to between $1.30 to $1.35 after a vote to leave the
EU (lowest level since 1985)
+ Implication on currency market:
2) Noteworthy gaps and slippage

 Currency markets opened with

noteworthy gaps for the major
currencies.
 The Euro, Pound and risk-on
currencies including the Australian,
Canadian and New Zealand Dollars
opened higher.
 The anti-risk Japanese Yen, 
Swiss Franc and US Dollar
 declined.
USD/ EUR/ GBP/ AUD/
JPY USD USD USD
Gap 0.37% 0.52% 0.77% 0.48%
+ Implications on currency market:

3) Large market movements and illiquid markets

 Causes increased margin requirements

4) Liquidity thins
 In times of risk aversion, the depth of available pricing begins to thin
 Markets such as ZAR, HUF, and CZK may see an imbalance of
trading on the bid and ask which could make it difficult to trade.

5) Wider spreads and rollover rates fluctuate

 banks pull in their quotes
 causes the reference and benchmark rates to widen out on the bid
and ask.
 as these spreads widen, it gets passed along into the retail market.
+ Determinants of exchange rates – Economic Factors in UK
Deceleration of GDP Growth
Decreased economic growth and health in Q2 2016

 Losses arising from lower trade

 55% increase in trade as an EU member >

economic benefit from cutting Britain’s annual net
contribution to the EU budget of some £8.5 billion
($12 billion)

 Lower foreign investment, especially in financial

services and cars

 Fewer onerous rules

 Migration
+ Determinants of exchange rates – Economic Factors
1. UK’s weakening sterling

 Roughly half of sterling’s

depreciation is estimated
to be attributed to Brexit.

 Sterling will collapse by

20pc, according to
analysts at Goldman
Sachs

 stock markets are tipped

to slide by up to 30pc

 Also affected by
economists expectation
+ Determinants of exchange rates – Economic Factors
2. UK’s trade deficits at historical high
 Elevated UK current account
deficit

 Financed by capital inflows

 portfolio and FDI inflows
accounted for around 16% of
GDP in 2015

 weaker outlook for UK national

income may call into question
the ability to maintain the
current large scale of capital
inflows.
+ Determinants of exchange rates – Economic Factors
2. UK’s trade deficits at historical high
 Foreign currency funding is a
significant proportion of UK
bank’s liabilities

 uncertainty = fragility in
market liquidity
+ Determinants of exchange rates – Market Psychology & Political Condition
3. UK’s uncertainty to trade with EU
 Relationship with EU is material for the
outlook for UK activity, inflation and
financial stability.
 50% of all UK trade
 48% of all foreign direct investment (FDI)
into the United Kingdom
 40% of all outward UK FDI

 Referendum will cause:

 Uncertainty about the outlook for UK activity
and inflation following the referendum 

 United Kingdom’s future trading

arrangements with other countries would
take some time to renegotiate

- Reduce confidence in sterling

- Discourage investments
+ Determinants of exchange rates –Political Condition
4. UK’s reduced influence in the EU
 Damaged political dynamic between EU and UK.
 by the ambivalence of the UK government to the EU
 by being outside the Eurozone.

 Political contagion.
 BrExit could liberate disintegrative, centrifugal forces elsewhere.

The uncertainty in the UK would also impact the EU.

With confidence low, and growth prospects weak,
the effect may may be significant.
+
Implications of Brexit
In the near term, a series of negative shocks would hit
economic activity in the UK.

 Sharp exchange rate depreciation

 Increased cost of imports, pushing up the inflation rate
 could boost exports, but may take 12 to 18 months to occur
 That is not least because it can take many years for an economy to
recover forgone short-term output (if it does). 

The longer-term effects are more controversial.

 In the long term, a rebound on the back of a vote to remain

within the EU may not materialise in any meaningful sense.

 The pound won't necessarily rally massively.

+
Implications of Brexit
Brexit would generate a large negative shock to the UK
economy, which would spillover to other European countries.

 Financial market shocks

 assumed to be of a magnitude similar to those observed during the
acute phase of the euro area crisis in 2011-12, but much smaller than
during the financial crisis in 2008-09

 Stocks in continental Europe would suffer more.

 10% downside for European equities at first (though this could be
offset by a swift policy response)

 Reinforced uncertainty about the future of the Union and the

Single Market.
 UK decision to exit could add to centrifugal forces in other parts of
Europe
+
Implications of Brexit
Brexit would pose a risk to global recovery.

 risk that the world could slip into a permanent cycle of low

growth, low inflation and low interest rates (IMF)

 severe regional and global damage by disrupting established

trading relationships
 extended period of heightened uncertainty

 ‘fragile’ growth in economy

 risks of recession and "secular stagnation”
 The global economy is expected to expand by 3.2pc in 2016 and
3.5pc in 2017, down from respective forecasts of 3.4pc and 3.6pc in
January.
+
Summary of implications
 Exchange rate volatility to hurt international trade volumes if it
persists for a significant period of time

 With MNCs managing risks over the short term by using

futures and options contracts, Brexit will not have much impact.

 The increased uncertainty over the last two months about the
result means the cost of buying protection against a large shift
in the value of the pound has increased dramatically.

 Vote to leave will raise sterling risk premia, investment and

equity risk premia and term premium on government long-term
bonds

 Companies with no protection will find their profit and loss

accounts will be heavily affected by large currency movements.
+
Conclusions
 Economic consequences for the UK from leaving the EU are complex.

 Increased fluctuation in the currency market is expected with unprecedented levels of

volatility

 Speculation on the direction of movement GBP against currencies such as USD,

EUR, YEN - hourly, daily, weekly and even monthly basis volatility of the currency
pairs

 With much greater uncertainty in the market, it is much more expensive for
companies to hedge the risk of a large movement in the pound against other
currencies. To manage currency exposure, risk must be assessed

 Some currency speculators will make large profits and others will make large losses
once the result is revealed.

“The only certainty is that

the exchange rate will fluctuate.”

+
Recommendations

 international diversification
 make sure investments are spread globally
 “Absolute return" funds to smooth market volatility. 
 "short selling", betting on falling shares, to achieve real returns each
year
+

2. Philippine Peso. Analysis of

the macro factors that impacts it.
By Sheena Nazareno
+
The Philippine Peso
 The Philippine Peso is currently trading at 46.33

 expected to trade at 46.74 by Q2 2016, according to Trading

Economics global macro models and analysts expectations.

 The USDPHP decreased 0.072 or 0.16% to 46.36 on Monday June 20

from 46.42 in the previous trading session.

 USDPHP gained 1.606 or 3.59% during the last 12 months from 44.76
in June 2015.

 Historically, PHP all time high is 56.34 in October 2004 and a record
low is 37.84 in May 1999.

 While the USDPHP spot exchange rate is quoted and exchanged in

the same day, the USDPHP forward rate is quoted today but for
delivery and payment on a specific future date.
+
The Philippine Peso
+
+
+
Philippine Peso – Overview of
Economic Indicators
+
1. GDP Growth Rate
+
1. GDP Growth Rate
GDP Growth = consumer spending = PHP value
 
 GDP advanced 1.1 % on Q1
 slowing from an upwardly revised 2.1% expansion reported in the previous
three months
 below market expectations

 The Philippines has a status of emerging economy.

 Steady growth mainly due to inflow of foreign direct investment and
remittances.
 world’s largest center for business process outsourcing
 a strong industrial sector based on the manufacturing of electronics
 rich in natural resources
BUT
 weakest growth since the June quarter 2015 as agriculture, hunting, forestry
and fishing contracted sharply while services and industry sectors slowed
+
2. Unemployment Rate
+
2. Unemployment Rate
Unemployment = consumer spending = PHP value
 

 Unemployment rate stood at 6.1% in April of 2016

 down from 6.4 percent a year earlier
 up from 5.8 percent reported in January 2016.

 Decreased overall consumer spending

 less income to spend on goods and services
 lower consumer confidence and lower expectations about the future
economic growth
+
3. Inflation Rate
+
3. Inflation Rate
Inflation = purchasing power = PHP value
 

 Consumer prices in Philippines rose 1.6% May 2016

 highest inflation rate since May 2015 as prices of food rose at
a faster pace while cost of housing & utilities dropped less
than in a month earlier.
 On a monthly basis, consumer prices rose 0.3%
 It was the fastest inflation rate since November 2015

 Decreased purchasing power

 each unit of a currency can buy fewer goods and services
+
4. Interest Rates
+
4. Interest Rates
 Interest rates = attractive to investors = PHP value
 

 The central bank shifts to an interest rate corridor system of 100bps

starting June 3rd 2016.
 aims to improve the transmission of monetary policy and help ensure that
money market rates move within reasonably close range around central bank
key rates.

 The central bank is committed to promote and maintain price stability

and provide proactive leadership in bringing about a strong financial
system conducive to a balanced and sustainable growth of the
economy. 
 Overnight lending rate reduced to 3.5% from 6%
 Special deposit account rate, left steady at 2.5 percent will be the floor rate of
the corridor.
+
5. Balance of Trade
+
5. Balance of Trade
Trade deficits = PHP demand = PHP value
 

 A trade deficit of USD1.75 billion in March of 2016

 larger than a 0.26 billion gap a year earlier as exports fell while imports rose.

 annual trade deficits due to high imports of raw materials and

intermediate goods.
 In 2013, the biggest trade deficits were recorded with: Taiwan, Saudi Arabia,
Thailand and South Korea
 biggest trade surpluses with: Japan, Hong Kong and the United States. 
+
6. Government Debt to GDP
+
6. Government Debt to GDP
debt:GDP = investor confidence = PHP value
 

 A record low debt-to-GDP ratio of 45.05 in 2015

 indicates an economy that produces and sells goods and services

sufficient to pay back debts without incurring further debt.
+
7. Political Stability
political uncertainty = investor confidence = PHP
 Long-serving Davao City Mayor Rodrigo Duterte is set to become the
Philippines’ next president on June 30

 Investor confidence will likely remain somewhat cautious until more

details are known about Duterte’s economic program and key
positions in the new government, including the vice-president and new
cabinet members.

 Duterte’s plan to shift towards a more federal form of government

might introduce a legal reform process that could increase political
uncertainty in the longer-term
+
Market factors
investor confidence = PHP
 As Benigno Aquino closes out a presidency that delivered the
Philippines four Standard & Poor’s rating upgrades, investors are
turning to the country’s dollar debt to shelter from peso losses.

 investors want to hedge their peso risk.

 Asian stocks fluctuated Tuesday, underscoring greater volatility in

financial and commodity markets that’s hurting growth prospects

 The nation’s U.S. currency bonds are rising almost twice as fast as
local notes
+
Speculation
 Stronger peso arising from foreign portfolio
 Philippine peso snapped a six-day rally on speculation
 companies took advantage of its recent gains to buy dollars to meet
their quarter-end needs.

Relative strength of other currencies

 The peso has fallen 0.8 percent in 2016
 trailing gains of 3.1 percent in Indonesia’s rupiah, 2.6 percent in Malaysia’s
ringgit and 1.3 percent in the Thai baht.
 marks a reversal of fortune for the Philippine currency
 The 50 basis-point drop in the yield of the Philippine 10-year dollar bond
this year compares with a 27-point decline in same-tenor peso notes to 3.83
percent.
+
Change in competitiveness
+
Change in competitiveness

 Competitiveness = PHP
 Competitiveness Index in Philippines averaged 4.13 Points
from 2007 until 2016, reaching an all time high of 4.39 Points in
2015 and a record low of 3.90 Points in 2010.
+
Conclusion

 Philippine Peso is highly sensitive to the macroeconomic

factors that surround it.

 Negative implications far outweigh positive implications of

select macroeconomic factors.

 This causes the Philippines Peso to depreciate.

 Unless the Philippines find a way to strengthen its monetary

policy and stabilize its politics, repositioning the Philippine Peso
will be a challenge.
+

Industry briefing on FXCM

and its major competitors.
Evaluation of market positioning, products,
resources and services. Identify FXCM’s
opportunities and challenges.
+
Introduction
 FXCM is a leading global provider of foreign exchange (currency)
trading and related services to retail and institutional customers. It
offers its customers the ability to trade contract for differences, spread
betting, equities and equity options.
 acts as an agency execution
 acts as a credit intermediary
 offers spot FX trading in approximately 45 currency pairs
 enables non-U.S. customers to trade contract for differences that include
contracts for metals, fixed income, energy, and stock indices;
 provides spread betting trading to the United Kingdom customers
 offers its customers access to over-the-counter FX markets through its
proprietary technology platform.
+
Introduction
 Founded in 1999, FXCM was the first forex broker to list on the New
York Stock Exchange (NYSE: FXCM) Inc 2010.

 FXCM’s large network of forex liquidity providers, including global

banks, financial institutions, prime brokers and other market makers,
allows the company to offer competitive spreads on major currency
pairs.

 FXCM has offices, partners, and affiliates in the major financial centers
of the world, uniquely positioning FXCM to provide exceptional service
to traders around the world.
+
FXCM Mission

“ FXCM Inc. (NYSE: FXCM) is a leading provider of

online foreign exchange (forex) trading, CFD
trading, spread betting and related services. Our
mission is to inspire global traders with access to
the world’s largest and most liquid market. By
offering the most innovative trading tools, hiring the
best trading educators, and meeting strict financial
standards to protect trader funds, we strive for the
best online trading experience in the market.”
+
FXCM Mission
MORE THAN 220,000 active accounts worldwide as of January
2015.

• With 800 employees, we are in 13 countries and are regulated across five entities.

5 TRADING PLATFORMS:
Trading Station, MetaTrader 4, Mirror Trader, and Ninja Trader.

15 years of award-winning forex trading services.

$3.9 TRILLION in retail trading volume for 2015.

• Our No Dealing Desk (NDD) execution model is competitive, transparent and fair.
+
FXCM’s Advantage
 FXCM’s large network of forex liquidity
providers, including global banks, financial
institutions, prime brokers and other market
makers, allows the company to offer FXCM OFFICES
competitive spreads on major currency • FXCM US
• FXCM UK
pairs. • FXCM GERMANY
• FXCM AUSTRALIA
 FXCM has offices, partners, and affiliates in • FXCM FRANCE
• FXCM ITALY
the major financial centers of the world, • FXCM GREECE
uniquely positioning FXCM to provide • FXCM JAPAN
• FXCM CHINA
exceptional service to traders around the
world. AFFILIATE OFFICES
• FXCM CANADA
• FXCM ISRAEL
• FXCM CHILE
+
FXCM’s Advantage
INVESTOR PROTECTION

 Three main benefits for FXCM LLC clients and potential clients:
 FINANCIAL STANDARDS AND OVERSIGHT
meets strict financial standards, including capital adequacy
requirements.

 GREATER TRANSPARENCY OF BUSINESS PRACTICES

regulation and financial transparency, registered with the U.S. regulatory
framework (widely regarded as one of the best in the world for investor
protection)

 A FRAMEWORK FOR DISPUTE RESOLUTION

+
Regulations
 FXCM LLC is a registered Futures Commission Merchant (FCM) and
Retail Foreign Exchange Dealer (RFED) with the Commodity Futures
Trading Commission (CFTC)

 A member of the National Futures Association (NFA).

 A vocal advocate of foreign exchange regulation and increased

investor protection, FXCM LLC is one of the first foreign exchange
firms to register as an FCM following the passage of the Commodity
Modernization Act in December 2000.
+
Financial Strength
 Auditors: Ernst & Young

Adjusted Q1/16 revenues of $71.5 million

Strong
Competitive Adjusted EBITDA from continuing and discontinued operations of $10.3 million
Position $203.0 million in operating cash

$633.2 million in customer equity

175,736 active retail FX accounts

Regulatory capital surplus of $107.2 million

Strong Minimum regulatory capital requirements for continuing operations (US, UK &
Australia) and discontinued operations is $60 million
regulatory
capital
position regulatory capital of $167 million
+
Liquidity Providers

 At the heart of FXCM's business is the commitment to offer

clients direct market access.

 FXCM LLC currently has 16 liquidity providers.

+
Liquidity Providers
 Each liquidity provider streams through a direct feed

 FXCM's NDD Price Engine selects the best buy price and the
best sell price, which result in the best available spread.
 no markup added to FXCM's Standard No Dealing Desk account type
 transparent and lowest spreads in the industry.
+
Awards
2015 INVESTMENT TRENDS - EDUCATIONAL MATERIALS

2015 FX STREET - BEST SELL-SIDE ANALYSIS CONTRIBUTOR: DAILYFX

STOCKS AND COMMODITIES AWARD - 2014 READER'S CHOICE AWARD

2009, 2010 FX-WEEK - WINNER BEST RETAIL PLATFORM

2010 MONEYAM - ONLINE FINANCE AWARDS - WINNER BEST ONLINE FX BROKER

2010 WHAT INVESTMENT MAGAZINE - READERSHIP AWARDS - BEST FX PROVIDER 2010

2010 FX TRADERS' CHOICE AWARDS - EAGLE AWARD: BEST FX BROKER - EUROPE FALCON AWARD: HIGH
BROKER SATISFACTION - OCEANIA, AMERICAS, AFRICA GLOBAL FX BROKER - OVERALL

2011 FXSTREET - BEST FX AWARDS - BEST BROKER RESEARCH TEAM: DAILYFX

2004, 2005, 2006, 2010 INC. 500

LIST OF AMERICA'S FASTEST GROWING COMPANIES FOUR TIME HONOREE
+
Market Positioning

 Move beyond FOREX

 Unified investments trading forex alongside oil, gold and stock indices

 FXCM developed a broad suite of platforms customizable to the specific needs

of the business clients.
 development team codes EAs, indicators and scripts to meet the demand for
automation
 The DailyFX PLUS Speculative Sentiment Index (SSI) is an excellent tool to gauge
trader positioning and sentiment in the forex market, and it can help you decide which
side of the trade to be on
 Suitable for various traders of any experience level

 Introduction of new spreads-plus-commission model 

 super-tight spreads and low commissions to give even more transparency to trades.
+
Products & Specialties
 No Dealing Desk forex trading execution
 eliminates any conflict of interest between broker and trader
 ensures that there is no dealer intervention in trades.
 executed back to back with one of multiple liquidity providers, which
compete to provide FXCM with bid and ask prices, providing tight,
competitive spreads on major currency pairs*.

 Forex Accounts, Active Trader Forex Accounts, Standard Forex

Accounts, Forex, Forex Trading, Currency Trading, Forex Broker,
FXCM, Forex Capital Markets, Investing
+
Products & Specialties
 Active Trader
 Custom Solutions
offers a level II type trading environment with 5 levels of market depth for a
liquidity view seen by market makers.
 Dedicated support – relationship managers & back office team
Short-term traders have the advantage of seeing actual liquidity available at
individual price levels.
 Premium Solutions - Market Insights and Expert Feedback
 Elite pricing
+
Major Competitors

IG Markets

• London HQ, privately held, founded 1974, 1001-5000 employees

CMC Markets

• London HQ, privately held, founded 1989, 501-1000 employees

Alpari Group

• London HQ, privately held, founded 1998, 501-1000 employees

ETX Capital

• London HQ, privately held, founded 2008, 51-200employees

+
Major Competitors
+
Opportunities

Arrival of new technologies

• Demand for mobile and tablet platforms

Unfulfilled customer needs

• Income level is at a constant increase

Amount of Capital & Leverage

+
Conclusion

 To gain sustainable competitive advantage, FXCM must

continually look for innovative ways to sustain and expand its
customer base.

 By providing maximum value to its clients and partners, the

brand will be strengthened, eventually leading to profits and
bigger market share.

 FXCM must also manage its risks, given the industry that it is
engaged in - Capitalizing on its financial strengths, and
maintaining Good Governance & Due Diligence.
+
+
FXCM Trading Station