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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

June 1, 2016 (see June 15 and June 23 updates below). Next update: July 6, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).

For the month of June, foreign exchange markets around the world will be dominated by speculation as to whether or not the United States Federal Reserve system will increase the short-term interest rates under its influence by ¼%, which will be enough of an increase to put downward pressure on all currencies throughout the world against the US dollar

Both the Euro and Japan yen weakened by around 2.5% against the US dollar in May. The Euro is slightly down from a year ago against the US$, while the yen is up over 11% since a year ago. The Iceland krona showed little change on the month, against the backdrop of a May 22 law giving holders of foreign-held krona assets (offshore krónur) some options when capital controls are lifted, one of which is the sale of their holdings at below-market exchange rates – the intention is to reduce the likelihood of severe capital outflows when Iceland capital controls are lifted (more on this in the WCO June 15 update below). The Mexico peso fell around 7% on the month against the US$ (down 20% since this time last year), and, while South America currencies were generally weaker on the month, the Argentina peso was up around 1% against the US$, with the Uruguay peso up around 2%. The United Kingdom pound, with the approach of the BREXIT vote later this month (see below), was little changed on the month against the US$, and was up around 2 ½% against the Euro. The Turkey lira fell nearly 5% against the US$, and is down nearly 11% since a year ago. The Georgia lari was up 4% on the month, while the Russia rouble fell by 2%, and is down 25% since a year ago. (There has been a great deal of anti-US dollar commentary in domestic Russian media).The South Africa rand fell nearly 10% in May against the US$, and is down over 30% since a year ago. There was a sharp downward movement in the Mozambique metical – Mozambique has been suspended from IMF and World Bank loans on allegations of misrepresentation of the level of Mozambique government debt. The Australia dollar fell by 6% in May against the US$ - both the New Zealand and Australia dollar are down around 6% since this time last year. The South Korea won fell nearly 3% on the month. The China yuan weakened a little in May (around 1.5%), and is down nearly 6% since a year ago.

Regarding the June 23 BREXIT vote on United Kingdom membership in the European Union, the debate is dwelling on the United Kingdom losing access to EU markets, on losing its share of the EU’s influence in the world (e.g., EU access to other markets), and on the extent to which withdrawal from EU membership would enhance United Kingdom self-identity (such as restrictions on immigration into the UK, the ability of UK citizens to move to other parts of the EU, and the freedom for the UK to write its own laws). Among many currency-related issues is the question of whether London would remain the world centre for foreign exchange trading (which is based on the US dollar values of currencies) if the United Kingdom were not in the European Union – the answer appears to be yes. The answer also appears to be yes on London remaining the world financial centre for most of a broad range of financial instruments (such as international bonds) after BREXIT, very important because of the enormous contribution made by the City of London financial district to the UK economy. Assessing the impact of BREXIT on the Euro value of the UK pound requires adding up the impact of changes in UK-EU financial flows which go in both directions, which will be very important for agriculture, as 40% of EU spending is agriculture-related (the Common Agricultural policy). The major multilateral economic organisations, such as the International Monetary Fund, the Organisation for Economic Cooperation and Development, the World Bank and the World Trade Organisation, have all come out publicly in support of a yes-vote for continued membership by the United Kingdom in the European Union (as has the President of the United States).

The 2015-2016 El Niño weather pattern has officially ended, and assessment of its worldwide impact – drought in some areas, heavier than normal rainfall in other areas – is continuing. There is a widespread view that El Niño has been responsible for the most severe droughts in 50 years for several agricultural areas of the world, including those of India, Vietnam and the countries of Southern Africa.

Oil prices increased in the last week to US$50 per barrel, which is around double the lowest level reached in February 2016, but still just 50% of what they were a year and half ago. Looking around the world, several other countries have had a difficult time coping with exchange rate movements related to the price of oil, but with the most attention focused on Nigeria and Venezuela. Also to be mentioned is Canada, where a month-long massive fire in the city at the heart of its main oil production region (Fort McMurray, Alberta) has resulted in no loss of life, but has reduced Canadian production by around a million barrels a day below its normal level of four million barrels/day. While North American oil prices are up, North American natural gas prices showed little movement in May.

June 15, 2016 update

After the release on the morning of June 3 of an official survey suggesting weaker-than-expected growth in United States employment, many currencies strengthened all over the world, on the expectation that the US Fed will not change its interest rates at its meetings on June 14/15. (Update: the US Fed did not change its interest rates on June 15.)

(More on the above-mentioned Iceland June 16 foreign currency auction). In Iceland, because of capital controls imposed after the Iceland bank crisis in 2008, Icelandic króna-denominated bonds (and notes, deposits, etc.) existing at that time, the bulk of which were held by foreigners, have not generally been convertible into foreign currencies, although interest and dividend payments are convertible (Iceland residents thinking of foreign currencies are generally thinking about Euros). While conversion from krónur to foreign currencies was not permitted, foreigners could still trade these bonds amongst themselves, and an offshore market developed. In this offshore market, an offshore value of the króna/1Euro emerged, which was higher than the official rate (50% higher was typical, the equivalent of a 50% discount on the króna), reflecting the expectation of when and at what future exchange rate the bonds would be converted into foreign currencies. The Iceland government (central bank) has run auctions from time to time which have given opportunities for foreigners to sell some of their bonds to the government for krónur, at a króna/1Euro rate based more on the value of offshore exchange rate rather than the market rate, thus representing a considerable discount from the market-rate value of these bonds. The government estimates that the amount of the króna bonds and other debt of this type which is still outstanding (June 2016), and which is looking for conversion, is around 320 billion krónur, and the government has announced an auction (deadline for offers: June 16), intended to complete conversion of the remaining bonds. So holders of the króna bonds can offer to sell their bonds to the government–as the króna-price of each bond is fixed by the central bank for this auction, the price part of the bid is the króna/1Euro rate asked for by the seller (although non-competitive offers to sell are permitted, which will be priced by the results of the competitive offers). The government has put a floor (actually, a series of steps) under the króna/1Euro value, which is dependent on the total amount offered for sale by all sellers, and thus provides a collective incentive for a larger offering for sale of bonds and other debt. If less than about 16% of total offshore bonds and other debt are offered to the government, the floor is 210 króna/1Euro. This floor then falls in steps as the total amount of bonds offered by all sellers rises, to 190/1Euro if more than 55% of outstanding bonds and other debt is offered. The market rate of the króna is 139/1Euro and 125/1US$, and so the terms of the Iceland government offer-to-buy implies a minimum 40% margin on the bonds and notes. The 190/1Euro floor on the exchange rate also implies the maximum amount of Euros Iceland will need for this conversion would be (worst case scenario) Euro 1.7 billion-Iceland has, roughly, at least the equivalent of Euro 4 billion available in foreign currency reserves. The completion of this auction, intended to be the last of this type, is viewed as a big step towards the elimination of capital controls in Iceland.

June 23, 2016 update

BREXIT June 23 2016

On the eve of the June 23 BREXIT referendum on whether the United Kingdom should leave or stay in the European Union, WCO looked at the evolution over the last ten months of the pound sterling, one of the great currencies of world history. Of all the BREXIT key dates, the most important was likely February 20, the date that PM Cameron announced the completion of negotiations for new UK-Europe arrangements, and also the date of the BREXIT referendum (another important date was November 10/15, the letter to the EU asking for a new arrangement for the UK in the EU). Prior to February 20, the chart above suggests the overall trend was a gradual weakening of the pound against the Euro and US$. The pound became stronger against the Euro until the end of November 2015 before weakening, resulting in the overall pre-February 20 downward trend against the Euro; the decline against the US$ was more uniform. In the four months since February 20, the pound has, overall, strengthened a little against the US$ (up around 3% as of June 22) and the Euro (up nearly 1.5%).

Nigeria has restructured its exchange rate regime as of Monday, June 20, moving towards a fully floating naira (“a single market structure”). The naira is still trying to find its level after this policy change, but current indications suggest it could settle somewhere within a +/-10% range around 325/US$. Nigeria is one of the world currencies which have been heavily influenced by the past year’s sharp movements in oil prices, due to its overwhelming dependence on oil exports, particularly for financing food imports, and Nigeria undertook many moves to restructure demand for foreign currency before moving to a full float. The pressure to move from the former official rate regime included suggestions of a large unmet demand for foreign exchange, reported to be in the $4 billion range (the Nigeria central bank held some foreign currency auctions to clear up some of the “backlog”). Also, Nigeria has announced the establishment of a naira futures market, to increase liquidity in the spot market (less need to buy and hoard currency for future transactions).

(World Currency Observer will next be updated on July 6, 2016. At the Euro 2016 football (soccer) championship, WCO staff are supporting Belgium and England. Visit Search to look at past issues of World Currency Observer (brochure edition).)