March 4, 2020 (see March 18 update below). Next update: April 1, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

The coronavirus health crisis, which has affected virtually every country in the world, is predicted to have some impacts on exchange rates, due to its inhibition on inter-country trade, travel and investment, and it has been widely remarked that the effects of all of these will undermine the inter-country supply chains, which have increasingly emerged as a dominant feature of world-wide trade over the last thirty years. For the moment, however, sharp falls in many commodity prices in January and February have generally been attributed to the impact of the coronavirus. One commodity to which WCO is paying particular attention is cotton, due to its link to clothing and textile exports, which we think would have particular links to personal health in nations around the world. Benchmark cotton prices, in US$ terms, were down 8% in February and 16% from one year ago (although these movements are not out-of-line with price movements in some other commodities whose link to the coronavirus would be less noticeable).

The Mexico peso fell by 4.5% in February 2020 against the US$, leaving it down by 2.2% from its value at this time last year. The Iceland króna is down 6% from this time last year. The Jamaica dollar moved up by nearly 1.5% against the US$ in February, coming down after reaching a recent peak of around 142 early in the month (around 1.2% lower against the US$ than this time last year). The Haiti gourde fell by nearly 3% against the US$ in February. The Brazil real fell by nearly 5% in US$ terms in February, and the Chile peso fell by 2.5% (down over 25% against the US$ since this time last year). The Colombia peso fell by over 3% in February against the US$, after a similar percentage drop in January. The Uruguay peso fell by 3.5% against the US$ in February. The Euro fell by 0.7% against the US$ in February, and is down by 3.5% since this time last year against the US$. The UK pound fell by nearly 3.5% against the US$ in February (down around 2% against the Euro) and the Norway krone was down by 2.7%. The Swiss franc is up by nearly 3.5% against the US$ since this time last year. The Turkey lira was down by nearly 3.5% against the US$ in February, and is down more than 16% since this time last year. The other East European currency with a sizeable downward movement since this time last year is the Hungary forint, down nearly 11% against the US$, with a small downward movement in February. The Russia rouble fell by 4.5% in February against the US$. The Ukraine hryvnia rose by 1.25% in US$ terms in February 2020, and, even after the 6.5% decline in January, the hryvnia is up nearly 15% since this time last year against the US$. The Egypt pound was up by 1.5% against the US$ in February 2020, and is now up by 11% over this time last year. The Iran rial fell by nearly 10% in February against the US$; the Lebanon pound, after a more-than-2% rise in February against the US$, is up against the US$ by 2.5% since this time last year. The South Africa rand fell by nearly 5% in US$ terms in February 2020 (after a 6.5% fall in January). The Zambia kwacha is down by nearly 25% against the US$ since this time last year. The Ghana cedi rose by 1.5% against the US$ in February. In February, the Sudan pound fell by 12%. The Tunisian dinar is up by nearly 6.5% against the US$ since this time last year. The Australia dollar fell by 3% against the US$ in February (after a fall of 5% in January), and is down by nearly 9% since this time last year; the New Zealand dollar also fell in February, and is down by 9% since this time last year. The China yuan is down by nearly 4.5% against the US$ since this time last year, after a 1% fall in February. The Laos kip has been showing a strong upward movement against the US$ in the first few days of March.

Several remarks and items of interest from the United States Treasury semi-annual report to the US Congress on exchange rate policies around the world. The “headline” is that China, the reports says, has committed to stop competitive devaluation and competitive targeting of the renminbi yuan/US$ exchange rate, and this commitment is enough for the U.S. Treasury to remove the designation of China as a currency manipulator (the Treasury report singles out summer 2019, saying that China took “concrete steps” at that time to devalue the yuan). The 10 countries being monitored for close attention to their trading practices (and U.S. Treasury comments which shed light on why they are being monitored) are as follows: China (the already-large China current account surplus could be under-estimated); Germany (the Germany bilateral trade surplus with the United States has more than doubled since the creation of the euro); Ireland (The significant and growing presence of large-scale foreign multinational enterprises (MNEs) with headquarters in Ireland has contributed notably to the average rise and increased volatility of the Ireland current account balance); Italy (Italy’s current account has been in surplus since 2013); Japan (large bilateral goods and services trade imbalance with the U.S.); Korea (the IMF, says the U.S., has considered the Korean won to be undervalued since 2010), Malaysia (a floating exchange rate regime, although the Malaysia central bank, the report says, often intervenes in the foreign exchange market); Singapore (“The Monetary Authority of Singapore (MAS) tightly manages the Singaporean dollar against a basket of trading partner currencies. Like other central banks MAS aims to achieve price stability in the domestic economy. However, MAS is uncommon in that it uses the nominal effective exchange rate of the Singapore dollar (the S$NEER) as its primary tool for monetary policy rather than using interest rates because external price pressures are more acutely felt in Singapore, where gross trade flows total roughly 400 percent of GDP.”); Switzerland (The SNB, says the report, has made the assessment that the franc is “highly valued.” Others have remarked that Switzerland is the only G-10 country that intervenes in foreign exchange markets on a regular basis as part of its approach); Vietnam (“Vietnam’s authorities tightly manage the value of the dong. Since January 2016, the State Bank of Vietnam (SBV) has allowed the dong to float +/- 3 percent against a basket of currencies within a previously established trading band, with daily updates to the reference rate.)” Also, the report remarks that the European Central Bank publishes its foreign exchange interventions, and has not intervened unilaterally since its founding.

March 18, 2020 update

With regard to coronavirus, whatever the ultimate health and mortality impacts, the economic and financial impact of (temporary, for the duration) border and business closures around the world will be sharp, but government and business measures to moderate the impact of the closures are just starting, and they have to be factored into forthcoming assessments. Among the things to be worked out are exchange rate impacts – at this point, many currencies have shown weakness against the US$, but there are, so far, some significant exceptions, and government foreign exchange authorities around the world have been announcing, working on and implementing currency market interventions.

There were many reports and indications of central bank of Brazil intervention in foreign exchange markets earlier in March, and it was generally agreed that the intention was to moderate and to reverse somewhat the weakening of the real against the US$, which had been happening long before the coronavirus. The thrust of exchange market interventions in Brazil by Banco Central do Brasil, under the framework of the National Monetary Council (Conselho Monetário Nacional, CMN) are generally seen as fully consistent with a floating exchange rate, with the intention of moderating movements of the real, and ensuring liquidity in all parts of the Brazil foreign exchange market. Intervention in Brazil foreign exchange markets, when it takes place, can target any exchange rate-related instrument - not just the spot foreign exchange market, but also currency swaps, forwards, futures and any other foreign exchange-related derivatives, on the understanding that, through arbitrage (e.g., the forward exchange rate curve), they all influence the spot rate (the issue and repayment of foreign currency debt also influence exchange rates). It is also generally agreed that the spot value of Brazil exchange rate is said to be mostly determined by arbitrage, between the near-term futures market exchange rate and the spot exchange rate. For this reason, Brazil foreign exchange intervention, when it occurs, is said to be heaviest in the near-term futures market, which is the most liquid. WCO notes that this linkage holds in many other currency (and commodity) markets as well, as futures trades are more often made on organized exchanges, with more transparency, although not necessarily more liquidity.

A thrust of the above-mentioned U.S. Treasury report on exchange rate manipulation is that the steady accumulation of foreign currency reserves (part of “net purchases of foreign currency”, which is broader than foreign currency reserve accumulation, as it also includes purchases of foreign exchange in forward and futures markets, and, in some instances, accumulation of foreign currency by entities such as state-owned companies and investment funds) by a government may indicate, to the Treasury, that a government may be trying to hold down the value of the currency (engage in “persistent, one-sided intervention”.) Reserve accumulation is however, excused by the report for cases like Vietnam, where accumulated reserves are below the generally agreed benchmark of money enough for three months imports (“as…reserves reach adequate levels…reduce…intervention and allow for movement in the exchange rate…including gradual appreciation of the real effective exchange rate.”). WCO remarks that the focus on change in foreign exchange reserves is different from the historic focus on the amount of foreign exchange reserves, as large foreign currency reserve holdings indicate that the country is in a position to put upward pressure on a currency (such as protecting a fixed rate regime, “supporting” the currency).

(World Currency Observer will next be updated on April 1, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition). For permission-to-quote enquiries, e-mail World Currency Observer at WCO@briargreen.com.)