January 2, 2015 (See January 20 update below. Visit Search to look at past issues of World Currency Observer (brochure edition).)

In 2014, the Euro and the Japanese yen weakened by around 14% against the US$, with most other currencies around the world down against the US$ by similar magnitudes. The exceptions were currencies connected to the Russian rouble (down by much more) and Pacific Rim currencies whose decline against the US$ was not as much as the decline in the Japanese yen. WCO is studying, with interest, the 2014 movement of the Ghana cedi - falling precipitously to nearly 4/US$ at the beginning of September 2014, then gaining strength steadily since then, but still down substantially since the beginning of 2014. There has been a very sharp downward movement in North American natural gas prices in December 2014.

While the United States embargo against Cuba is still firmly in place (because it based on legislative measures that only the US Congress can revoke, with strict enforcement supported by a strong anti-Castro political constituency), President Obama has indicated that he will take measures to strengthen United States economic ties with Cuba. Besides restoring formal diplomatic relations by exchanging ambassadors (the US has had in place for many years, in Habana, a large office of economic interests), and initiating the removal of Cuba from the US “list of terrorist states”, the remittance threshold for funds to Cubans has been raised to US$2000/quarter (per person) from US$500. It should also be noted that the convertible peso (CUC) remains fixed at 1/US$, so that, due to the strength of the US$, the value of the CUC has gone up substantially in 2014 against the currencies of many of Cuba’s trading partners, including the Euro, the Japanese yen (and other Asian currencies) and the Canadian dollar.

As of yesterday (Jan 1, 2015), the Euro is the currency of Lithuania, at a conversion rate of 3.4528 litas for 1 Euro, a rate which has been in effect since June 2004, when Lithuania joined the European Exchange Rate Mechanism as a first step towards full adoption of the Euro. Permission to join the Euro was confirmed in June 2014 when Lithuania passed the European Commission convergence tests, which are based on government debt and deficits, the rate of inflation and on long-term interest rates. All the three former Baltic Sea states of the former USSR (Estonia, Latvia, Lithuania) are now in the Euro, and they are surrounded by non-Euro states – Russia (Russian rouble), Belarus (Belarus rouble) to the south and Poland (zloty) to the west. Across the Baltic Sea, Estonia is the closest to EU member Finland (Euro) , and Estonia was the first to adopt the Euro on Jan 1/11. Latvia joined the Euro on Jan 1/14.

The Russian banking sector has been hard-hit by a combination of sanctions (which include reduced bank access to world financial markets for liquidity purposes), the falling rouble, contraction of the economy and bank runs (related to ordinary citizens shifting from roubles to dollars – Russian bank deposits are covered by deposit insurance). Russian authorities have announced cash injections (total: in the 300 billion rouble range) into VTB Bank, Gazprombank, and Trust Bank (which was already considered under-capitalised). There seems, however, to have been no official indication of special support for the largest Russian bank, Sberbank, which has been a particular target of sanctions connected with the situation in the Ukraine.

January 20, 2015 update

Last year’s large fall in oil prices, which has fed through to deflation in many countries of the world, is now forcing central banks to deal with its implications for monetary policy. The path ahead is clear for areas with deflation and weak economic growth, such as the European Union, which is now, after much discussion among member states over the last year, on the brink of the introduction of US-style quantitative easing (increasing the liquidity of the banking system with the large-scale purchase of government bonds), It is less straightforward for areas such as the United Kingdom, which is combining below-target inflation with strong economic growth and, at the same time, considerable economic slack.

The Swiss National Bank (SNB) has decided to discontinue the minimum exchange rate of 1.20 Swiss francs per Euro with immediate effect (January 15) and to cease foreign currency purchases associated with enforcing it. The Swiss franc strengthened quickly to about 1 franc/Euro. Even with the decline of the Euro against the US$, the Swiss franc has risen more than 10% against the US$ since the announcement.

(World Currency Observer will next be updated on February 3, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)