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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

March 1, 2017 (see March 15 and March 17 updates below.) Next update: April 5, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).)

The Euro fell by 1% against the US $ in February, leaving it just over 3% weaker since this time last year. The UK pound (with a March 31 “target” for its next BREXIT move) gained a little against the Euro in February, but is down against the Euro by about 7% over the last year. The Japan yen rose by 2% against the US$ in February. The Iceland króna surged up against the US$, leaving it 17% stronger than a year ago-there is general concern in Iceland that the strength of the krona is beginning to hurt its tourist industry, particularly for potential visitors from the United Kingdom. The Mexico peso rose by over 5% against the US$ in February (see below). The Brazil real rose around 1.5% on the month against the US dollar, and is up nearly 23% since this time last year. The Paraguay guaraní rose by over 4% in February against the US dollar (there was an interesting story this month about a huge load of Venezuelan currency being found in a private residence). Currencies in former USSR countries, such as Russia and the Ukraine, were mostly stronger in February against the US$ - the exception was a 4% fall in the Uzbekistan som. The Iran rial rose over 4% in February, but is still 25% weaker than a year ago. The Egypt pound fell by around 4% in February against the US$, and is now around 18.1/US$ (the value of the pound has been quite stable, although somewhat weaker, since the massive devaluation in November 2016.). The South Africa rand rose more than 4%on the month, and is up by 20% against the US dollar since this time last year. The Democratic Republic of Congo franc fell by more than 6% on the month, and is down by more than 40% since this time last year against the US$. The Ghana delasi fell by nearly 6% in February. The South Korea won and the Taiwan dollar got stronger in Febuary against the US$ and against the China yuan - the China yuan is 5% weaker against the US$ than it was a year ago. The India rupee rose by 2% against the US$ in February.

There were a variety of pressures on foreign exchange rates around the world over the last 4 months, and countries reacted or coped in different ways – in the paragraphs below, WCO looks at Mexico, Nigeria and Turkey. It can also be mentioned that China has taken a number of measures over the last year to discourage capital outflows, which they feel have unduly weakened the yuan. And it should be added that many countries which were faced with exchange rate volatility chose to do nothing, due to a “let the market decide” policy stance, or because they were comfortable with the direction in which the foreign exchange market took their currency.

For Mexico, the value of the peso is one focus of monetary policy, because of the potential impact on prices in Mexico, and Mexico intervenes in currency markets from time to time to manage the value of the peso, led by the central bank and finance ministry officials. Consistent with this approach, there were media reports of a multi-billion US dollar intervention (purchase of pesos) by Mexico at the end of February, and of a sizeable intervention at the beginning of January (as noted above, the Mexico peso rose by 5% against the US$ in February). The ability of Mexico to intervene is helped by the fact that the Mexico peso is generally regarded as the most liquid of all emerging market currencies –one factor is a steady flow of large amounts of remittances into Mexico from Mexican workers in foreign counties, who are particularly interested in converting from US dollars into Mexico pesos. Another aspect of the Mexico approach to the foreign exchange market: the government of Mexico hedges the price of its principal export, oil.

The Nigeria official rate for the naira is at around 305/US$, while the parallel rate is around 520/US, and inflation is running at just under 20% per year. The Nigeria central bank has noted that Nigeria national “monthly foreign earnings” have fallen from over US $3.2 billion at one point in 2013 to below $500 million per month sometime in 2016. So Nigeria continues to face a month-by month administrative and political challenge in allocating foreign exchange (US dollars, Euros, etc.) among a variety of competing needs and uses. These range from broad categories such as food imports, equipment for manufacturers and raw materials, to more specific needs such as education and personal travel allowances. Despite the recent rises in world oil prices (Nigeria’s major export), pressure on the naira remains strong.

The Turkey lira was under particularly strong downward pressure over the last three months, and fell from around 3/US$ in October 2016 to as low as 3.9/US$, speculative movements in the view of the government of Turkey, not warranted by economic fundamentals (its current level is 3.6/US$). So the government of Turkey resisted the downward pressure on the lira with a wide variety of the means available to all sovereign governments, but there was particular attention in the media to interventions by the central bank in the first half of January, intended to decrease lira liquidity and force up very short-term interest rates (e.g. those with maturities of one day). These included: a new in-Turkey facility for foreign exchange swaps (simultaneous spot purchase of liras for dollars by banks from the central bank, and forward sale of liras for dollars); reduced borrowing limits for very short-term lira loans from the central bank; setting the precedent that repo auctions may not in future be automatically held every week, intended to shift bank liquidity borrowing to a “penalty” facility with a high interest rate (the Late Liquidity Window); reduced foreign exchange required reserve ratios for banks, with this measure projected by the central bank to add US$1.5 billion in foreign currency to financial system; and allowing, in certain cases, foreign exchange deposits based on Turkey lira reserves.

The United Nations has declared that a state of famine (presence of starvation, death, and destitution) exists in South Sudan, the first such declaration in 6 years. (The South Sudan currency fell by more than 9% in February to around 89.3/US$, compared to its value of 21.6/US$ at this time last year.)) South Sudan is oil-rich and was formerly part of the country of Sudan, from which it broke off in 2011, and with whom it has been engaged in war since 2013. South Sudan borders on the northern parts of Kenya and Uganda, the western part of Ethiopia, and the eastern parts of Central African Republic and the Democratic Republic of the Congo. Other nearby Horn of Africa countries are Djibouti, Eritrea and Somalia. These are all areas which are currently food-stressed due to recent drought -the additional factor in South Sudan is the war situation. The assessment of a state of famine in any country is based on a protocol known as the Integrated Food Security Phase Classification (IPC) which, in the words of its secretariat “ …is a set of standardized tools that aims at providing a "common currency" for classifying the severity and magnitude of food insecurity. This evidence-based approach uses international standards which allow comparability of situations across countries and over time. It is based on consensus-building processes to provide decision makers with a rigorous analysis of food insecurity along with objectives for response in both emergency and development contexts.

March 15, 2017 update

The Central Bank of Somalia has confirmed, on its website, that it wants to start printing its own banknotes later this year, for the first time since 1991. Somalia relies on the US dollar as its anchor currency. One noteworthy innovation: the US dollar and other currencies are used to purchase credits from mobile phone companies, and the transfer of these credits among clients is how many transactions are paid for in Somalia. This system works particularly well for remittances from Somalis working abroad. But, there is still a substantial amount of very old Somali shilling notes in circulation, and these notes trade at around 24000/1$US.

South Africa (the Competition Commission and the Competition Tribunal) is moving to reach settlements with as many as 23 financial institutions it says were involved in illegal collusion regarding tradng of the South Africa rand over the period 2007 to 2013 - much of this trading occurred abroad, such as in the United States and the United Kingdom. South Africa initiated investigation of alleged rigging of the market for the rand in the wake of legal settlements reached in 2015 between US and other nation's financial regulators, and major financial institutions, over foreign exchange rigging, much of which was in connection with the daily 4:00 pm fix in London of the value of major currencies. The South Africa allegations focus on four currency pairs: the rand against the US$, the Euro, the Turkey lira and the Mexico peso. Illegal activities alleged include: submission of fake bids to trading platforms in order to manipulate market bids and offers; collusion in fixing the bid-offer spreads indicated to customers; sharing information about customers to allow dealers to each offer the same prices to customers, setting the stage for "fake" discounts; and manipulating the timing of orders, such as ensuring that large orders did not put too much pressure on market exchange rates.

March 17, 2017 update

It is hard to see a clear impact on currency markets in the first two days after the March 15 US Fed announcement of an increase of ¼ of 1 per cent in its very short-term interest rates (with an indication of 2 more increases in 2017). This result, likely what was hoped for, may be because of all the other policy “noise” emanating from the US, such as President Trump’s first budget. Also, a Huffington Post report, one month ago, of the President asking a senior advisor for a view of whether the US would benefit more from a higher or lower US dollar, has since generated an ongoing debate and discussion in the US, adding to a sense that it is not clear which way the US wants to see its dollar move.

(World Currency Observer will next be updated on April 5, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).)