April 1, 2015 (See April 15 update below. Next update: May 1, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)
The Euro is down by over 25% against the US$ since this time last year, and the yen is down by over 15%. Many currencies of the world are between the US$ and the Euro, i.e., up against the Euro and down against the US$. Among the exceptions are the majority of currencies in the Caribbean and the Middle East, most of which are linked to the US dollar. Among those in the Middle East not linked to the US$ is the Israel shekel, down by 13% on the year against the US$, but with little movement over the last month (Israel’s elections were held on March 17, amidst discussion that more weakness in the shekel would be appropriate). The Brazil real is down 13% over the last month. The Russian rouble and Ukrainian hryvnia rose sharply over the last month against the US$, but are still down substantially on the year. News of fraud-related bankruptcies in the Hungarian financial sector do not seem to have fed through to the forint, which is, broadly, moving in the same direction/amounts as other Eastern European currencies.
With the approach of a March 31 deadline, there was significant momentum towards the establishment of the Asian Infrastructure Investment Bank (AIIB), with many countries (eg, Brazil, France, Germany, Italy, United Kingdom) announcing that they will participate. The Asian Infrastructure Investment Bank is an initiative of the government of China, for which it has been building support since first proposing its establishment in October 2013, as a way to stimulate economic growth, in an world environment which, it noted, includes reductions in government spending and tax increases in many countries, and (at that time) the end of quantitative easing monetary policy in the United States. China has said it proposed the establishment of the bank because the world economic recovery is still fragile, and that one of the gaps which can be filled is infrastructure financing in Asia. Other large multilateral institutions focus more on poverty reduction rather than broader economic stimulus (World Bank, Asian Development Bank), and the new bank is to complement these other efforts. The lending and financing mandate for AIIB will be roughly the same as that of the soon-to-be-established New Development Bank (formerly known as the BRICS Development Bank), whose founding members are Brazil, Russia, India, China and South Africa, and which is to also have $50 billion in capital. Aside from the financial resources, participation of non-Asian countries in AIIB is deemed logical, China has noted, as economic strength in Asia is positive for other parts of the world, including Europe and the Americas. China thinks the bank’s capital should be around US$ 50 billion, and is willing, if necessary, to provide the major part of this –it says its participation will be less if other countries step up.
The governor of Danmarks National Bank gave a resume (March 25) of the battle that Denmark fought over the last two months against upward pressure on the krone against the Euro, in order to preserve the 15-year old krone/Euro peg (7.46038 kroner/Euro, +/- 2.25%) The upward pressure on the fixed exchange rate krone became very strong on January 15, when Switzerland was forced by the market to allow the Swiss franc to rise above its 1.2 franc/Euro ceiling, leading to the expectation that Denmark would also have to let its currency rise against the Euro (and the pressure increased a week later, with the EC announcement of its QE monetary policy). So there was massive purchase of the krone -the governor remarked that 2/3 of the demand came from Danish pension funds and insurance companies, mostly hedge transactions (he did not say which methods they used). The result was a foreign currency market battle between the Danish central bank and major Danish financial institutions. The governor noted that the Danish government has an unlimited supply of its own currency and, as it was determined to preserve the peg, the only victor could be the Denmark central bank, so the peg remains intact (different to a situation where there is downward pressure, where foreign exchange reserves always have some limit). The Danish krone, like the Euro, has fallen by over 25% on the year against the US$.
April 15, 2015 update
Since the latter part of March, most exchange rates have shown more stability against the US$, and the “storm” in commodity and currency markets, which was strongest in the January to February period, has relented for the moment. A note from WCO: prior to the Organisation for American States summit in Panama, President Obama attended a meeting of Caribbean leaders (CARICOM), where one of the issues was the impact of evolving US ties with Cuba on the rest of the Caribbean and Central America (e.g, Jamaica, just to the south of Cuba). Exchange rates in the region are fixed against the US$ or move around it in a narrow band, part of their anchor to the US economy.
(World Currency Observer will next be updated on May 1, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)