June 4, 2019 (see June 19 update below) Next update: July 3, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Mexico peso dropped steeply against the US$ on the last day of May, pursuant to a message from President Trump ("On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied"), leaving the peso down by 3.7% on the month, but still up by nearly 2% against the U$$ since this time last year. After a 5.7% decline against the US$ in May, the Haiti gourde is down nearly 40% against the US$ since this time last year. The Costa Rica colón strengthened by 1% against the US$ in May, leaving it down by 4% since this time last year. The Dominican Republic peso fell by nearly 2% against the US$ in May. The Chile peso fell by nearly 4.5% against the US$ in May, and the Colombia peso fell by 3.5%. It was announced that Brazil GDP shrank in the first quarter of 2019 - the Brazil real is down by 5.2% against the US$ since this time last year, after no net movement in May. In a month when the Euro showed no net change on the US$, the UK pound fell against the US$ by 2.5%, and the Switzerland franc rose by 1.5%. The Ukraine hryvnia moved up by 3.4% against the US$ in May, leaving it down by 7% against the US$ since this time last year. After falling in April by over 4% in April, the Zambia kwacha fell by a further 5.5% in May, leaving the kwacha down 30% since this time last year. The South Africa rand fell by 2% in May against the US$; the rand started 2019 at about 14.4, and is now at about 14.6/1US$. The Sudan pound rose by nearly 5% against the US$ in May, and the Ghana dalasi fell by nearly 6%. The Liberia dollar showed no net movement against the US$ in May, after weakening in April, and is down about 25% since this time last year against the US$. As noted last month, end-of-May weakness in the China yuan against the US$ was reflected in weakness by currencies of other Asian countries with strong supply-chain connections to China, especially the South Korea won and the Taiwan dollar. The China yuan was down 2.6% against the US$ in May, while the Japan yen rose by a strong 2.6% (it is now level with the US$ since this time last year). The New Zealand dollar fell by more than 2% in May, and is down by nearly 7.5% against the US$ since this time last year. The India rupee strengthened a little in May (India, like Turkey, is being removed from the US Generalized System of Preferences preferential tariff list). The Pakistan rupee fell by 6.5% in May against the US$ and is down by 30% since this time last year. The Malaysia ringgit was down against the US$ by 1.5% in May. There was a sharp drop in oil prices in the last two weeks of May (trade war worries, the toughening US stance on Iran sanctions), which moved then to a level 17% below a year ago at this time. The list of commodities with prices above last year is limited in length, but includes maize and rubber.

With the announcement that the United States will, toughen enforcement on 3rd parties of its sanctions on Iran (part of the May 8 package), there has been more attention (e.g., a Wall Street Journal article) to methods of payments, to and from Iran, which are U.S. dollar denominated, but do not involve banks in the U.S. The U.S. sanctions say that no foreign financial institution can “knowingly conduct[] or facilitate[] any significant financial transaction” connected to the list of goods under sanction, and the U.S. is in a position to penalise any major financial institution which violates this rule, since major banks’ payment facilities to settle U.S. dollar transactions are all, to some extent, based in the United States. So it is a matter of finding ways to make U.S. dollar payments without using U.S. banks. The systems which have been set up to make such payments (such as the EU INSTEX system) are, in concept, similar to payment procedures in the 19th century under the “fixed” exchange rates of the gold standard, when bills of exchange were used for foreign currency payments across borders, with the result that cross border payments were settled within countries (with importers making payments to exporters), with no requirement for gold to be shipped from one country to another (unless the bill of exchange rate moved outside the fixed currency to gold or silver rate so that settlement in gold or silver was made – there is no such anchor for the rial/US$ rate, which can weaken without limit). The analogy to avoiding, in the 19th century, the expense of shipping gold from one country to another, is, in 2019, avoiding the use of U.S. banks (through their accounts at the Federal Reserve) to clear U.S. dollar payments among countries, and it is hard to disagree that this aspect of the US sanctions on Iran, a major oil producer, will weaken international reliance on the US dollar as a world currency, no matter how efficient the new payment systems are.

The United States Treasury semi-annual review of exchange rate restrictions by other countries in support of unfair trade advantages with the United States makes its assessment by three criteria, two of which are measurements of foreign country trade surpluses with the US (trade in goods surplus) and with the world as a whole (current account surplus), which is why Germany, Ireland and Italy are on the Monitoring List, despite having no direct control over the Euro and despite, as noted in the Report, that “the European Central Bank (ECB) has not intervened unilaterally in foreign currency markets since 2001.” The third criterion, intervention in foreign exchange markets, is not just about the sale of domestic currency (accumulation of foreign exchange reserves) in the spot foreign exchange market, to push down the US dollar value of the currency. “Treasury’s measure for intervention is more frequent and broader in scope, covering activity in the spot, forward, and swap markets. “ One baseline measurement is whether a country has accumulated more reserves than necessary to finance three months of imports (Vietnam, which is on the Monitoring List, is below this threshold), although the criteria used for the 21 countries which were assessed for this year’s Report extend beyond central banks – for example, the Report assesses the activity of China state banks. The Report says that “Treasury assesses net purchases of foreign currency, conducted repeatedly, totaling in excess of 2 percent of an economy’s GDP over a period of 12 months to be persistent, one-sided intervention”, and adds up sales and purchases over an entire year to form its assessment. But the criterion goes beyond reserves, and includes the measurement of net forward book (intervention in the forward exchange market on the sell side). Among the countries on the Monitoring List, Singapore and South Korea are both publishing periodic information bulletins on the extent of their intervention, with Singapore, the only country named for violating the intervention criterion, vigorously denying that it intervenes to obtain a trade advantage. Among other countries, with regard to Switzerland (not on the Monitoring List), it is noted that: “the Swiss National Bank publishes a single annual figure for net intervention in its Annual Report. The SNB reported that it purchased 2.3 billion francs (about $2.4 billion) in foreign currency in 2018 to influence the exchange rate.”

June 19, 2019 update

U.S. President Trump has announced that the previously announced 10% tariffs on imports from Mexico to the United States (see above) will not go ahead, due to movement by Mexico on issues related to migrants into the United States.

India has increased tariffs on a list of U.S. goods (agricultural and others) which it had marked for tariff increases two years ago, after the U.S. imposed aluminium and steel tariffs on India and other countries. The imposition of the tariffs had been deferred several times, and the decision to impose them now is widely seen as a response to the recently announced ending of Generalised System of Preferences (GSP) tariff concessions to India by the United States (the United States has a trade deficit with India, and has been making high-level calls for India to open its economy more). The India exporters association has listed the goods for which the GSP withdrawal will have the most impact on india exports to the U.S. (imitation jewellery, leather articles, some medical products, chemical and plastic products, and some agricultural products), but has also noted that the loss of the 5-7% GSP benefit could be offset, if India would cut taxes on exports of these products. Another detailed list which has appeared in India media is that of India products which, it is suggested, could benefit from the U.S.-China trade war, comprising India goods which could replace China exports to the U.S., and India goods to replace US exports to China (of course, WCO soundings suggest that every country in the world is analysing how they can benefit from the China-United States trade war).

Another controversy which has recently emerged in India, with relevance to the value of the rupee, is the impact of a Gross Domestic Product survey change, which resulted in a change in reported GDP growth for the last few years. The issue is whether, as implied by the change, economic growth in India over 2011/12 to 2016/17 has been at China-levels of around 7% as measured by the new survey approach, or whether, using the old survey measurement approach, India economic growth has been “only” robust, in the 4.5% range, which is still very high when compared with annual population growth in the 1.3% range (against this backdrop, over the same period, the US$ value of the rupee fell by around 40%.) The controversy has been summarised and analysed in a recent paper by Arvind Subramanian, and two aspects of his approach are of particular interest to WCO. The first of these is a comparison made between the official government measurement of Gross Domestic Product for India, and the performance of key economic variables which are estimated independently of the GDP survey, which are: electricity consumption, 2-wheeler sales, commercial vehicle sales, tractor sales, airline passenger traffic, foreign tourist arrivals, railway freight traffic, index of industrial production, index of industrial production (manufacturing), index of industrial production (consumer goods), petroleum consumption, cement, steel, overall real credit, real credit to industry, exports of goods and services, and imports of goods and services. It is suggested in the paper that the performance of these indicators, in the period before and after the survey change, supports the contention that economic growth after the survey is less than reported using the new survey method. The second aspect of interest to WCO is what changes in the new GDP survey may have been responsible for the change in reported GDP estimates. Two broad changes are identified (generally applicable to any attempt to improve measurement of the informal economy): a movement to vastly expand the number of companies covered by the survey is said to have led to some types of measurement bias, including the use of data which may have been inferior; and the use of a goods price deflator for a services series. The author mentions a third possible change, which is that a proxy intended to estimate activity in the informal manufacturing sector may not be working properly, although the author suggests that this may be more of an issue during the demonetisation and introduction of GST periods, which took place after the period covered by his data work. The controversy over these suggestions will continue in India, with the next step likely to be detailed comments by India GDP statisticians (who have already strongly defended the new approach).

(World Currency Observer will next be updated on July 3, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).)