June 5, 2018. Next update: June 20, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

(World Currency Observer continues its tradition of monitoring intra-month movements of all world currencies.) The Mexico peso fell by 6.5% against the US$ in May, and the Iceland króna fell by just over 4%. The Canada dollar is 4% stronger against the US$ than this time last year. The Jamaica dollar in May reversed its April strength in May, down by 1.2% against the US$ in May, leaving it up 2% against the US$ since this time last year. The Honduras lempira fell by 1.1% in May against the US$, down nearly 2% since this time last year. The Brazil peso dropped by 7.4% in May - after the decline in May, the Brazil peso is down by 15% against the US$ since this time last year (see below for more on Brazil). South America currencies all showed significant weakness against the US$ in May, but the movement since this time last year is mixed - down for the Uruguay peso and the Paraguay guarani, up for the Chile peso and the Colombia peso, no change for the Guyana dollar. The Euro (and the United Kingdom pound) fell by more than 3.5% against the US$ in May, leaving both currencies around 3.5% stronger against the US$ than this time last year. The Switzerland franc strengthened a little on the month against the US$, leaving it down 2.1% since this time last year against the US$, and down by nearly 6% against the Euro (now at 1.15/1Euro). The Turkey lira fell by more than 11% against the US$ in May (down around 7.5% against the Euro in May), leaving it down 27% against the US$ since this time last year, with the magnitude of the movement attributed by many commentators to a now-abandoned reluctance by the government to raise interest rates - Turkey policy interest rates were moved up sharply at the end of May (and their structure simplified), with further increases expected later this week. The Russia rouble was steady in May, after a sizeable drop in April, leaving the rouble down by 10% against the US$ since this time last year. The South Africa rand fell by 2.5% against the US$ in May, but is still nearly 1% stronger than this time last year. The Angola kwanza fell by 7% against the US$ in May, and has now fallen by around 42% since it moved to a floating exchange rate at the beginning of 2018. There was general weakness in currencies in the northern parts of Africa in May, with the largest movement the 5% drop in the Tunisia dinar against the US$, leaving the dinar down 4% since this time last year. The Liberia dollar fell by 4.8% in May, and is now down by more than 23% against the US$ since this time last year. The China yuan fell by 1.2% against the US$ in May (there were similar movement by many, but not all, other Pacific Rim currencies in May 2018), leaving the China yuan 6% stronger against the US$ than this time last year. The big exception was the Japan yen, slightly stronger against the US$ in May, and up more than 1.5% since this time last year. The Pakistan rupee is down by over 10% against the US$ since this time last year.

The Brazil peso is currently at 3.74/1$US, down by more than 5% in May (15% down since this time last year), at the end of a national 10 day lorry drivers strike, in a softening economy with “considerable economic slack” (“com alto nível de ociosidade dos fatores de produção”, May 22 COPOM central bank monetary policy report ) – unemployment is at more than 13% (which would easily be the highest in South America were it not for Venezuela) and headline inflation is at less than 3%, which is well below the Brazil central bank target. So what next? For the central bank, after marginal downward movements in policy interest rates over the last few months (principally the SELIC overnight interest rate), no downward movement this month, with the focus on keeping the peso strong enough to avoid risks in achieving the inflation target, already at risk due to the weakness so far this year in the peso. (Similar thinking is expected from central banks around the world in the current and coming months.)

WCO made some technical notes on the retaliatory measures announced by Canada, Mexico and the European Union in response to the 10% aluminum/25% steel tariffs imposed, starting June 1, 2018, by the United States. Each jurisdiction estimated the value of their aluminum/steel exports affected by the US tariffs, and then selected a list of products for 10%/25% retaliatory tariffs (rebalancing duties/equivalent restrictions), whose total value equals the value of steel and aluminum exports to the U.S. affected by the US tariffs (Canada: Cdn$16.6bn, to go into force July 1/18; Europe: EU exports worth €6.4 billion in 2017, in-force date to depend on the timing of a process initiated with the World Trade Organisation, which will also give EC member countries an opportunity to comment; Mexico measures appear to be put into force immediately). Products in the 25% retaliation groups are generally steel related, while products in the 10% group are more diverse, and are the reason why the lists of retaliated products appear so different for each jurisdiction in media reports. Because it deals with 28 member countries, the European Union has a 4 year-old regulation in place outlining the procedures involved in initiating retaliation in trade disputes, including assessment of the impact on member countries, which makes the selection of products for retaliation more complicated than for Canada and Mexico (although Canada and Mexico also have to pay attention to the impact on provinces and states in selecting products for retaliation). Of course, for the EU, an eventual issue is how BREXIT will affect its list of products –if the tariffs are still in force then (likely they will be), will the existing list be large enough when the United Kingdom leaves, and will the US explicitly add the U.K. to the steel and aluminum list? The Mexico list of imports for retaliation is noticeably agricultural – besides steel products, it includes pork legs and shoulders, sausages, food preparation ingredients, apples, grapes, blueberries and cheese. Trade disputes are part of life for each country, and they are “fought” on an industry-by-industry basis, under WTO rules or under rules laid out in more local free trade agreements. The disputes can graduate to a war when industries which are not part of the dispute become involved in the retaliatory response, and this has happened partly because the two-way steel and aluminum trading relationships are not in balance, but also because part of the US agenda is to force more concessions from Canada and Mexico in the sputtering North American Free Trade Agreement negotiations, so that, so far, there is little indication that the US will back down. A reminder that the U.S.-expressed concern is not with the trade balance in aluminum or steel products, and it is not whether or not the countries affected are adequate or safe suppliers, and it is not even particularly about national security (although this is the legal justification being used); the concern expressed is with the erosion of US productive capacity in the aluminum and steel industries (a reminder that, for the U.S., the real target should be China). Also, while the value of the trade flows are “large”, they are in the neighbourhood of, say, 5% of total goods trade in each of the jurisdictions; an important fact for WCO staff mulling over the impact of the steel and aluminum dispute on exchange rates, as exchange rates reflect entire bilateral trade and investment balances.

On February 28, the Haiti government issued an executive order requiring all financial transactions in Haiti to be conducted with, and specified in, only in the Haiti gourde, including all commercial transactions, the wording and settlement of contracts, and posted prices (to be only in gourdes). The gourde has remained very stable over the last year, falling less than 3.5% against the US$ since this time last year, despite year-over-year inflation currently running around 14%. It is perhaps an indication of additional downward pressure on the gourde that the government, on May 25, announced that a total of US$30 million in gourde purchases would be made at the end of May and beginning of June (a previous purchase of US$25 million was announced on January 23).

(World Currency Observer will next be updated on June 20, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition). At the FIFA World Cup of football (soccer), WCO will be supporting France and Mexico, and is keeping an eye on the Egypt team.)