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FX and Rates

Brief FX & Rates: Risk Aversion, Not Panic, in Face of Uncertainty and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Risk Aversion, Not Panic, in Face of Uncertainty

1. Risk Aversion, Not Panic, in Face of Uncertainty

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Major currencies, equity markets and the price of crude oil since 8th June – the cycle low in the US Dollar – have exhibited reasonably limited directionality, narrow trading ranges and very low volatility, with the notable exception of currencies in Central and Latin America.

However this is not a case of more confident financial market participants finding their feet, in our view.

Rather it is a reflexion of greater global risk aversion, with financial markets unable to see through the smoke and reluctant to pit themselves against their peers and test monetary authorities’ resolve at a time of still acute uncertainty on many levels.

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Brief FX & Rates: Chinese Renminbi – Canary in the Coal Mine and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Chinese Renminbi – Canary in the Coal Mine
  2. Conservative FX Markets Testing (Some) Extremes

1. Chinese Renminbi – Canary in the Coal Mine

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While the United States and China have not gone as far as re-introducing or increasing tariffs on each others’ imports, the war of words between the two trading superpowers has clearly escalated with Hong Kong caught in the middle.

In line with our expectations the Chinese Renminbi has depreciated versus (a weaker) Dollar and in nominal effective exchange rate terms in recent weeks (see Figures 1 & 2).

Precedent suggests the Renminbi’s slide to an 11-week low is not coincidental but the by-product of the PBoC’s conscious decision to modestly weaken its currency and send a clear, if subtle message to the United States that China can retaliate in more ways than one.

The implications of a breakdown in US-China relations and a resumption of a full-blown trade war would of course reach far beyond a possible acceleration in the pace of Renminbi depreciation.

For starters any sustained Renminbi weakness would likely increase the odds of other Asian currencies also depreciating versus the Dollar with hands-on central banks keen to maintain their countries’ export competitiveness, particularly at this current juncture.

It is no coincidence, in our view, that Asian currencies on the whole remain highly correlated with the Renminbi and have underperformed since 12th May (see Figures 3 & 4).

Moreover, the introduction of new import tariffs would, based on precedent, likely have a material and negative impact on world trade at a time when macro data suggest that global economic activity has only just started to very slowly recover from a very low base.

Any further headwind to global trade would likely delay any meaningful recovery in global supply and demand (see Figure 5) and cast further doubts on whether sequential global GDP growth can forge a V-shaped recovery in Q3 and Q4 2020 – the topic of our next Smartkarma Insight.

2. Conservative FX Markets Testing (Some) Extremes

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The majority of major developed and Emerging Market currencies have contnued to trade in narrow ranges versus the US Dollar in the past three weeks. 

The five narrowest ranges (<1.5%) have all been recorded by Asian currencies. We attribute this to the willingness and ability of Asian central banks to keep their currencies broadly aligned with the currencies of their main trading partners – namely the Chinese Renminbi and US Dollar – which have been particularly stable in recent weeks.

27 of these 32 major currencies have depreciated or appreciated by 2.5% or less against the US Dollar over this period.

On the surface it would seem that markets, faced with acute uncertainty, are keen to fade any material currency moves.

However, half of these 32 major currencies were, as of yesterday’s close of business, at or testing the extremes of their admittedly (in most cases) narrow ranges versus the US Dollar, with the Brazilian Real within touching distance of its record low (hit on 8th May) and conversely the Philippines Peso at a multi-year high.  

The question is which of these currencies is likely to extend their gains/or losses and/or potentially break out of its recent ranges.

Near-term we see downside risks to the Chinese Renminbi and Brazilian Real versus the US Dollar and Swiss Franc.

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Brief FX & Rates: Conservative FX Markets Testing (Some) Extremes and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Conservative FX Markets Testing (Some) Extremes
  2. Impending US Dollar Demise? COVID-19 Pandemic Aftermath Will Strengthen the Greenback’s Importance

1. Conservative FX Markets Testing (Some) Extremes

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The majority of major developed and Emerging Market currencies have contnued to trade in narrow ranges versus the US Dollar in the past three weeks. 

The five narrowest ranges (<1.5%) have all been recorded by Asian currencies. We attribute this to the willingness and ability of Asian central banks to keep their currencies broadly aligned with the currencies of their main trading partners – namely the Chinese Renminbi and US Dollar – which have been particularly stable in recent weeks.

27 of these 32 major currencies have depreciated or appreciated by 2.5% or less against the US Dollar over this period.

On the surface it would seem that markets, faced with acute uncertainty, are keen to fade any material currency moves.

However, half of these 32 major currencies were, as of yesterday’s close of business, at or testing the extremes of their admittedly (in most cases) narrow ranges versus the US Dollar, with the Brazilian Real within touching distance of its record low (hit on 8th May) and conversely the Philippines Peso at a multi-year high.  

The question is which of these currencies is likely to extend their gains/or losses and/or potentially break out of its recent ranges.

Near-term we see downside risks to the Chinese Renminbi and Brazilian Real versus the US Dollar and Swiss Franc.

2. Impending US Dollar Demise? COVID-19 Pandemic Aftermath Will Strengthen the Greenback’s Importance

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Since the Bretton Woods Conference in 1945, there have been numerous accusations of the US abusing the dollar’s position as the leading reserve currency for a variety of reasons, ranging from achieving geo-political objectives to the desire of individual Presidents to get re-elected.

Periodically, doubts about the US dollar’s role as the world’s leading reserve currency surface in the media. Currently, such concerns revolve around the response of the US to the COVID-19 virus outbreak, namely significant easing of monetary and fiscal policy settings, as being another harbinger for the demise of the US currency within the international monetary system. These fears will subsequently prove to be unfounded. 

Despite the media’s berating of the Trump Administration’s response to the COVID-19 pandemic, China is likely to emerge weaker both economically and geo-politically than the US in its aftermath.

Meanwhile, a Bretton Woods-style conference is probably required to design a new international financial system that boosts the role of other currencies. Such a landmark event will, however, be highly unlikely as countries focus on domestic agendas in the aftermath of the COVID-19 pandemic.

In order to dilute the dollar’s role at the heart of the international monetary system, countries with aspirations to fill the dollar’s vacuum need to undertake the necessary ground work, involving institutional and structural reforms. Notably, China has fallen way short in the required preparatory work for the RMB to being an considered an international store of value and, consequently, a safe-haven asset. China’s reluctance to embrace a new growth model, along with structural reforms, will simply enhance the dollar’s dominance within the global financial system in aftermath of COVID-19.    

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Brief FX & Rates: Impending US Dollar Demise? COVID-19 Pandemic Aftermath Will Strengthen the Greenback’s Importance and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Impending US Dollar Demise? COVID-19 Pandemic Aftermath Will Strengthen the Greenback’s Importance
  2. Smartkarma Webinar

1. Impending US Dollar Demise? COVID-19 Pandemic Aftermath Will Strengthen the Greenback’s Importance

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Since the Bretton Woods Conference in 1945, there have been numerous accusations of the US abusing the dollar’s position as the leading reserve currency for a variety of reasons, ranging from achieving geo-political objectives to the desire of individual Presidents to get re-elected.

Periodically, doubts about the US dollar’s role as the world’s leading reserve currency surface in the media. Currently, such concerns revolve around the response of the US to the COVID-19 virus outbreak, namely significant easing of monetary and fiscal policy settings, as being another harbinger for the demise of the US currency within the international monetary system. These fears will subsequently prove to be unfounded. 

Despite the media’s berating of the Trump Administration’s response to the COVID-19 pandemic, China is likely to emerge weaker both economically and geo-politically than the US in its aftermath.

Meanwhile, a Bretton Woods-style conference is probably required to design a new international financial system that boosts the role of other currencies. Such a landmark event will, however, be highly unlikely as countries focus on domestic agendas in the aftermath of the COVID-19 pandemic.

In order to dilute the dollar’s role at the heart of the international monetary system, countries with aspirations to fill the dollar’s vacuum need to undertake the necessary ground work, involving institutional and structural reforms. Notably, China has fallen way short in the required preparatory work for the RMB to being an considered an international store of value and, consequently, a safe-haven asset. China’s reluctance to embrace a new growth model, along with structural reforms, will simply enhance the dollar’s dominance within the global financial system in aftermath of COVID-19.    

2. Smartkarma Webinar

In our next Smartkarma Webinar, Olivier Desbarres will discuss his outlook for Asian currencies. The webinar will be held on 1 April 2020 at 1700hrs Singapore/Hong Kong time.



Olivier Desbarres has over 21 years of experience in the finance industry, including 15 years as a senior Economist, Rates and FX strategist for Credit Suisse and Barclays in Moscow, London and Singapore.

In his last role, he was Head of Asia-Pacific FX Strategy at Barclays in Singapore and focal point for G10 research. Prior to that, Olivier covered Emerging Europe, Middle and Africa at Credit Suisse in London where he built a strong track record with the world’s largest fund managers. He was also the UK Rates Strategist for two years and wrote extensively on EU and Eurozone membership.

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Brief FX & Rates: Smartkarma Webinar and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Smartkarma Webinar
  2. Emerging Market Central Banks Playing Catch-Up
  3. Global Growth Shaken, Central Banks Stirred

1. Smartkarma Webinar

In our next Smartkarma Webinar, Olivier Desbarres will discuss his outlook for Asian currencies. The webinar will be held on 1 April 2020 at 1700hrs Singapore/Hong Kong time.



Olivier Desbarres has over 21 years of experience in the finance industry, including 15 years as a senior Economist, Rates and FX strategist for Credit Suisse and Barclays in Moscow, London and Singapore.

In his last role, he was Head of Asia-Pacific FX Strategy at Barclays in Singapore and focal point for G10 research. Prior to that, Olivier covered Emerging Europe, Middle and Africa at Credit Suisse in London where he built a strong track record with the world’s largest fund managers. He was also the UK Rates Strategist for two years and wrote extensively on EU and Eurozone membership.

2. Emerging Market Central Banks Playing Catch-Up

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Developed central banks in the past week have been falling over themselves to loosen monetary policy and secure the proper functioning of financial and credit markets.

The Fed, RBNZ, Bank of Canada, Bank of England and Norges Bank have delivered inter-meeting policy rate cuts of between 50bp and 100bp and our measure of the developed central bank policy rate has been cut 74bp so far in March, the largest monthly cut since December 2008. It is now in negative territory (-0.05%) for the first time in at least 15 years.

This has raised concerns that developed central banks are close to running out of ammunition, at least in terms of policy rate cuts, which have arguably weighed on global equities and contributed to the outperformance of the Dollar, Euro, Swiss Franc and Yen.

In contrast, major Emerging Market (EM) central banks have, with the exception of Bank of Korea and Banco Central de Chile, kept their policy rates unchanged in the past fortnight. This is broadly in line with our view that “the overall pace and magnitude of [central bank] policy rate cuts in Non-Japan Asia will be modest.”

The EM central bank policy rate – a GDP-weighted average of policy rates in 20 major EM economies – was admittedly cut a sizeable 74bp between mid-2019 and end-January 2020 but has been cut only 4bp so far in March, albeit to a new multi-decade low of about 4.3%.

We think EM central banks are concerned that further rates cuts could exacerbate capital outflows and put further downward pressure on their currencies and upward pressure on already high and/or rising headline CPI-inflation.

As a simple rule of thumb we think EM central banks with a high real policy rate and stable/appreciating currencies are more likely to cut their policy rates in coming weeks (see Figure 7). On this basis central banks in India, the Philippines and Taiwan seemingly have room to cut rates.

We also think that the South African Reserve Bank will cut rates at its policy meeting on 19th March, as long as the Rand remains broadly stable as it has been in the past week.

3. Global Growth Shaken, Central Banks Stirred

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The drastic measures which governments across the world have taken so far to mitigate the spread of the coronavirus have few precedents outside of war times and therefore quantifying their economic, financial and social impact remains challenging. 

However, there is little doubt that economic activity in China, the epicentre of the epidemic, has slowed sharply. Disruptions and delays to international supply chains are impacting global trade and production. Moreover, there is growing evidence that this supply-side shock is feeding through to the demand-side, heaping pressure on the service sector and retailers and forcing governments and corporates to postpone long-term investment plans. 

Our core scenario, based partly on developments in the global manufacturing PMI, remains that global GDP growth, which had looked set to pick-up slightly in Q1 2020 from about 3.0% yoy in H2 2019, will slow to around 2.5% yoy in Q1, its slowest pace in a decade.

This would in turn imply that quarter-on-quarter global GDP growth halved to around 0.35% in Q1 from an average of 0.7% per quarter in 2019 and that the world may, based on the IMF’s definition, be teetering on the verge of a recession.

Recent (uncoordinated) central bank policy rate cuts, including the Fed’s inter-meeting 50bp cut, likely further cuts and recently announced modest fiscal stimulus measures will near-term have only a marginally positive impact on global economic growth, in our view. They will have reduced the odds of a global recession but those odds remain significant.

However, history suggests that central bank rate cuts may well give further impetus to any global economic recovery further down the line, facilitating a V-shaped recovery.

Non-Japan Asian central banks have largely been on the sidelines in the past month, in line with our expectations, but the risk is now biased towards more rather than fewer rate cuts. China’s exchange rate policy in favour of a “strong” Renminbi is indicative.

The coronavirus has lowered the until recently high bar for a Bank of England policy rate cut and our core scenario is for a 25bp cut at its 26th March meeting. Similarly, we think the RBNZ will cut rates 25bp on 25th March while noting the RBNZ’s penchant for surprises.

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Brief FX & Rates: Emerging Market Central Banks Playing Catch-Up and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Emerging Market Central Banks Playing Catch-Up
  2. Global Growth Shaken, Central Banks Stirred

1. Emerging Market Central Banks Playing Catch-Up

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Developed central banks in the past week have been falling over themselves to loosen monetary policy and secure the proper functioning of financial and credit markets.

The Fed, RBNZ, Bank of Canada, Bank of England and Norges Bank have delivered inter-meeting policy rate cuts of between 50bp and 100bp and our measure of the developed central bank policy rate has been cut 74bp so far in March, the largest monthly cut since December 2008. It is now in negative territory (-0.05%) for the first time in at least 15 years.

This has raised concerns that developed central banks are close to running out of ammunition, at least in terms of policy rate cuts, which have arguably weighed on global equities and contributed to the outperformance of the Dollar, Euro, Swiss Franc and Yen.

In contrast, major Emerging Market (EM) central banks have, with the exception of Bank of Korea and Banco Central de Chile, kept their policy rates unchanged in the past fortnight. This is broadly in line with our view that “the overall pace and magnitude of [central bank] policy rate cuts in Non-Japan Asia will be modest.”

The EM central bank policy rate – a GDP-weighted average of policy rates in 20 major EM economies – was admittedly cut a sizeable 74bp between mid-2019 and end-January 2020 but has been cut only 4bp so far in March, albeit to a new multi-decade low of about 4.3%.

We think EM central banks are concerned that further rates cuts could exacerbate capital outflows and put further downward pressure on their currencies and upward pressure on already high and/or rising headline CPI-inflation.

As a simple rule of thumb we think EM central banks with a high real policy rate and stable/appreciating currencies are more likely to cut their policy rates in coming weeks (see Figure 7). On this basis central banks in India, the Philippines and Taiwan seemingly have room to cut rates.

We also think that the South African Reserve Bank will cut rates at its policy meeting on 19th March, as long as the Rand remains broadly stable as it has been in the past week.

2. Global Growth Shaken, Central Banks Stirred

C9

The drastic measures which governments across the world have taken so far to mitigate the spread of the coronavirus have few precedents outside of war times and therefore quantifying their economic, financial and social impact remains challenging. 

However, there is little doubt that economic activity in China, the epicentre of the epidemic, has slowed sharply. Disruptions and delays to international supply chains are impacting global trade and production. Moreover, there is growing evidence that this supply-side shock is feeding through to the demand-side, heaping pressure on the service sector and retailers and forcing governments and corporates to postpone long-term investment plans. 

Our core scenario, based partly on developments in the global manufacturing PMI, remains that global GDP growth, which had looked set to pick-up slightly in Q1 2020 from about 3.0% yoy in H2 2019, will slow to around 2.5% yoy in Q1, its slowest pace in a decade.

This would in turn imply that quarter-on-quarter global GDP growth halved to around 0.35% in Q1 from an average of 0.7% per quarter in 2019 and that the world may, based on the IMF’s definition, be teetering on the verge of a recession.

Recent (uncoordinated) central bank policy rate cuts, including the Fed’s inter-meeting 50bp cut, likely further cuts and recently announced modest fiscal stimulus measures will near-term have only a marginally positive impact on global economic growth, in our view. They will have reduced the odds of a global recession but those odds remain significant.

However, history suggests that central bank rate cuts may well give further impetus to any global economic recovery further down the line, facilitating a V-shaped recovery.

Non-Japan Asian central banks have largely been on the sidelines in the past month, in line with our expectations, but the risk is now biased towards more rather than fewer rate cuts. China’s exchange rate policy in favour of a “strong” Renminbi is indicative.

The coronavirus has lowered the until recently high bar for a Bank of England policy rate cut and our core scenario is for a 25bp cut at its 26th March meeting. Similarly, we think the RBNZ will cut rates 25bp on 25th March while noting the RBNZ’s penchant for surprises.

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Brief FX & Rates: Global Growth Shaken, Central Banks Stirred and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Global Growth Shaken, Central Banks Stirred

1. Global Growth Shaken, Central Banks Stirred

C4

The drastic measures which governments across the world have taken so far to mitigate the spread of the coronavirus have few precedents outside of war times and therefore quantifying their economic, financial and social impact remains challenging. 

However, there is little doubt that economic activity in China, the epicentre of the epidemic, has slowed sharply. Disruptions and delays to international supply chains are impacting global trade and production. Moreover, there is growing evidence that this supply-side shock is feeding through to the demand-side, heaping pressure on the service sector and retailers and forcing governments and corporates to postpone long-term investment plans. 

Our core scenario, based partly on developments in the global manufacturing PMI, remains that global GDP growth, which had looked set to pick-up slightly in Q1 2020 from about 3.0% yoy in H2 2019, will slow to around 2.5% yoy in Q1, its slowest pace in a decade.

This would in turn imply that quarter-on-quarter global GDP growth halved to around 0.35% in Q1 from an average of 0.7% per quarter in 2019 and that the world may, based on the IMF’s definition, be teetering on the verge of a recession.

Recent (uncoordinated) central bank policy rate cuts, including the Fed’s inter-meeting 50bp cut, likely further cuts and recently announced modest fiscal stimulus measures will near-term have only a marginally positive impact on global economic growth, in our view. They will have reduced the odds of a global recession but those odds remain significant.

However, history suggests that central bank rate cuts may well give further impetus to any global economic recovery further down the line, facilitating a V-shaped recovery.

Non-Japan Asian central banks have largely been on the sidelines in the past month, in line with our expectations, but the risk is now biased towards more rather than fewer rate cuts. China’s exchange rate policy in favour of a “strong” Renminbi is indicative.

The coronavirus has lowered the until recently high bar for a Bank of England policy rate cut and our core scenario is for a 25bp cut at its 26th March meeting. Similarly, we think the RBNZ will cut rates 25bp on 25th March while noting the RBNZ’s penchant for surprises.

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Brief FX & Rates: INDIA: Illiquid INR Government Bonds to Outperform and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. INDIA: Illiquid INR Government Bonds to Outperform

1. INDIA: Illiquid INR Government Bonds to Outperform

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2019 has been a good year for investors in local currency Indian government bonds but we see a year of mediocre returns in 2020. A combination of fewer policy rate cuts and continuing fiscal deficit concerns will keep long-term interest rates from falling further, in our view.

Our analysis shows that when interest rates are stable or rising, illiquid government bonds tend to outperform their liquid comparators. This outperformance is observed both in terms of capital appreciation (favourable price movements) and in total returns (including carry). Going into 2020, for long-term investors, we see value in switching out of liquid INR government securities into illiquid INR government securities.

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Brief FX & Rates: US Rates: A Bid for Real Yields and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. US Rates: A Bid for Real Yields
  2. The Growing Weight of Digital Currencies in Mainstream Finance

1. US Rates: A Bid for Real Yields

  • The US FOMC will announce its policy rate decision later today. The recent volatility in global crude oil prices has changed the dynamics a little. Developments in the Middle-East can have a supply side shock to inflation, which in general, could affect global demand. Weak global demand has been pushing the Federal Reserve to make insurance cuts.
  • With global central banks maintaining an accommodative policy stance while domestic economic data in the US is still robust, adding protection against inflation is prudent, in our view.
  • US interest rates have risen over the recent few trading sessions. For investors seeing this as an opportunity to long Treasuries, we see value in owning real rates relative to nominal rates. At current levels real rates are historically cheap to nominal rates.

2. The Growing Weight of Digital Currencies in Mainstream Finance

  • Digital currencies are gaining regulators’ attention. Bank of England Governor Mark Carney’s speech at the Jackson Hole Symposium is one acknowledgement of a need for a new economic order where virtual currencies could provide a solution.
  • Digital currencies help overcome the zero lower bound problem which interest rate markets face today, in our view. Though this requires the phasing out of cash, it is easier said than done. The development of the e-Krona in Sweden offers an interesting case study.
  • With the introduction of the People’s Bank of China (PBoC) digital currency, we expect the debate between privately-owned and central bank-owned digital currencies to gain steam. In our view, central banks will have to overcome the baggage of traditional finance to make a meaningful dent in the digital currency space, which is not easy; On the other hand, there is no known mechanism to control private crypto currency inflation.
  • The world is looking for a new monetary order. Virtual currencies are likely to find a way in there, we believe.

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Brief FX & Rates: The Growing Weight of Digital Currencies in Mainstream Finance and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. The Growing Weight of Digital Currencies in Mainstream Finance

1. The Growing Weight of Digital Currencies in Mainstream Finance

  • Digital currencies are gaining regulators’ attention. Bank of England Governor Mark Carney’s speech at the Jackson Hole Symposium is one acknowledgement of a need for a new economic order where virtual currencies could provide a solution.
  • Digital currencies help overcome the zero lower bound problem which interest rate markets face today, in our view. Though this requires the phasing out of cash, it is easier said than done. The development of the e-Krona in Sweden offers an interesting case study.
  • With the introduction of the People’s Bank of China (PBoC) digital currency, we expect the debate between privately-owned and central bank-owned digital currencies to gain steam. In our view, central banks will have to overcome the baggage of traditional finance to make a meaningful dent in the digital currency space, which is not easy; On the other hand, there is no known mechanism to control private crypto currency inflation.
  • The world is looking for a new monetary order. Virtual currencies are likely to find a way in there, we believe.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.