April 1, 2021 (see April 14 update below) Next updates: April 28 and May 4, 2021. Visit Search to look at past issues of World Currency Observer (brochure edition).

Regarding the blockage of both the north and south lanes of the Suez Canal, due to a stuck ship (the Ever Given) in the single lane section from March 23 to March 29, there were local reports of interrupted shipments of oil, and the Baltic Index (of worldwide shipping freight rates, with a much broader sample size than just the rates connected to the use of this very important waterway) hit 12 month highs, in the 2300 range. Nine months ago, after the Covid-19 economy lockdowns took hold, the Baltic Index went as low as the 400 range. Looking at the size of this increase, WCO remarks that there is a vast difference between commodity groups and currency exchange rates for year-over-year comparisons from the Covid-19 lockdown month of March 2020 to the just-ended month of March 2021. The percentage change of many commodity prices (but not all) over that period are huge, while the year-over-year change in exchange rates since then looks more moderate, reflecting in part the general continuation of two-way trade flows throughout the pandemic.

There are indications of yet more Covid-19 "waves", which have just led, or are leading, to another round of economic lockdowns, but this round will be offset, to some extent and with wide variation among countries, by increased distribution of the growing supply of vaccines. North America currencies showed upward movement in the 10% range against the US$ since this time last year. The Jamaica dollar was up by nearly 4% against the US$ in March, and is now down by 8% against the US$ since this time last year. South America currencies generally weakened against the US$ in March 2021, with the exception of the Paraguay guarani, up 5% on the month (and up 5% since this time last year against the US$). The Chile peso and the Colombia peso are both up strongly against the US$ since this time last year. In March, the Euro fell by 3% against the US$, continuing the weakness it has shown since the start of 2021. The Norway krone rose by 1% in March, and is up by nearly 18% since this time last year against the US$. The Turkey lira fell by 15.5% in March 2021 against the US$, erasing all of the gain it had made since last November (see below). The Poland zloty fell by 8% against the US$ in March, but is still up by 4% against the US$ since this time last year. The Albania lek rose by 1% against the Euro in March 2021. The Russia rouble fell by 3% against the US$ in March (but was steady against the Euro), and is up by 4.5% against the US$ since this time last year. The Angola kwanza was up by 4.5% against the US$ in March, and was down by 15% since this time last year. The South Africa rand was up by 2.5% against the US$ in March, and up by 17% since this time last year. The Mozambique metical was up by 4.5% against the US$ in March. The Japan yen was down by 4% against the US$ in March, and down by 3% against the US$ since this time last year. The China yuan is up by 7.5% against the US$ since this time last year. The Pakistan rupee was up by 3.5% against the US$ in March and is up by 7.5% since this time last year. The India rupee is up by 3% against the US$ since this time last year.

One year later, WCO continues to review the trajectory of exchange rates immediately before, during, and immediately after the March 2020 Covid-19 world economic shutdown, as reliable data on financial flows and goods and services flows around that time becomes increasingly available (along with the usual revisions). Last year, in the last week of February 2020 and the first week of March, as the news and awareness of the Covid-19 risk became more and more widely recognized, US short-term interest rates started a sharp decline, and many currencies (but not all) strengthened against the US$ - examples include China, Japan and Euro-related currencies (many of the currencies which did not strengthen at that moment were experiencing declines in their domestic interest rates, often policy-led). Then there was an abrupt turnaround, after the first week of March (starting around March 10/20), as a broad range of currencies (some would say, most currencies around the world) weakened sharply against the US$ until March 23. Also, United States short term interest rates bottomed out on March 26, briefly going negative (which was another moment of strength for many currencies against the US$), before rising to a barely positive level, where they stayed for the rest of 2020. For the rest of 2020, most currencies drifted upward against the U$, but have begun to weaken in the first part of 2021. One piece of the story is illustrated, in our view, by the extensive analysis by the Bank for International Settlements in its recently-released quarterly report (March 1), which presents and analyses data indicating a flight to US dollar holdings by non-bank financial institutions in 2020 (the “dash for cash”), which would have been more than could have been handled by world financial markets, but for the fact that central banks around the world coordinated efforts to increase the world supply of US dollars (swap lines, etc.) As the US dollar is the core currency for international trade and currency trading, one could imagine the effects such a shortage might have had. (Throughout 2020 and 2021, in the face of general economic lockdowns and border closures, countries have generally declared trade-related activities to be essential, with one result being that trade in goods and services, with the exception of tourism, has continued). As noted, an issue related to the expansion of the quantity of US dollars is that countries have also increased the amounts of their own currencies (money supply) – WCO will talk about this more in future issues.

The governor of the central bank of Turkey was dismissed on March 20, two days after a boost in Turkey policy interest rates, which took the 1 week repo rate to 19% on March 18 (against a current inflation rate of around 15%), the last of a steady increase in very short-term rates – the 1 week repo rate was at just 8.25% in July. At the same time, Turkey 10 year bond yields are at around 14%, well below the repo rate, and up by around 1.50% since this time last year, which is much less than the 9% upward movement of the repo rate since this time last year, so the Turkey interest rate yield curve is steeply inverted. Past statements and actions of the Turkey president (Erdogan) have tended to indicate a focus on the level of interest rates, no matter what the inflation rate or the value of the lira, and this was generally cited as the reason for his dismissal of the central bank governor – if so, an indication of this would have been downward movement of the repo rate by the new central bank governor, but this has not happened yet, due, possibly, to the abrupt weakness in the lira since the dismissal. There are several factors of note in Turkey, beginning with the fact that its economic growth over the last year has been among the highest in the world, 2nd only to China, and above that of another strong performer, Taiwan. Contributing to Turkey economic growth has been the larger percentage depreciation of the lira over the whole of 2020, which had been succeeded by a strong upward movement of the lira in the first three months of 2021 (until the dismissal of the central bank governor).

April 14, 2021 update

In the last few weeks there has been more clarity in how governments plan to act over the next couple of years in overcoming the financial burden which will be left by the pandemic (on the understanding that, even in countries where vaccination has been the most advanced, the raw numbers show that Covid-19 is still raging, which is not helped by a general sense of fatigue over shutdowns and lockdowns and masks). For less developed countries, the G20 governments are calling on private and public sector lenders to maintain a debt service freeze for another six months, until the end of 2021. (“…the IMF estimates that low-income countries would need to deploy around USD 200 billion up to 2025 to step up response to the pandemic and build external buffers and an additional USD 250 billion in investment spending to accelerate their income convergence with advanced economies…We will further step up our support to vulnerable countries as they address the challenges associated with the COVID-19 pandemic…We call on the IMF to make a comprehensive proposal for a new Special Drawing Rights (SDR) general allocation of USD 650 billion to meet the long-term global need to supplement reserve assets.”) For developed countries, the United States is suggesting, in its new Made in America tax plan paper, measures which, when summarized, amount to, more or less, worldwide minimum corporate income taxes (base rate of 28 per cent). (“Although countries have strong incentives to work together to counter tax competition, they will not stop the race to the bottom unless enough large economies adopt a minimum tax on foreign earnings. The Made in America tax plan’s proposed replacement of the ineffective BEAT would be transformative in that regard by incentivizing other large economies to join the United States in taking the first step to adopt strong minimum taxes on corporations and leveling the playing field between the taxation of domestic and foreign corporations.”). This may be an easy next step for developed countries, which will all be looking at sources of revenue to finance the debt left by the pandemic, but the biggest impact (such as on exchange rates) could turn out to be when it is enforced against the tax haven countries of the world. Haven countries named in the US tax plan are: Bermuda (10 percent of all reported U.S. multinational foreign profit, according to the U.S. paper), Cayman Islands, Ireland, Luxembourg, Netherlands, Switzerland and Singapore.

The recent death of the economist Robert Mundell is a reminder of the influence of the Mundell-Fleming model, which includes what Graham Greene might have entitled, in the context of the traditional economic model, “The Third Equation”, which has the exchange rate and national income directly affecting the balance of trade in goods (and services); and capital inflows and outflows (aggregated as net capital flows in the equation) adjusting very quickly if “the” domestic interest rate differs from “the” world interest rate. Taken as a whole, the model, as traditionally presented, implies that, in the context of an expansion of government spending (pushing interest rates up) or an expansion of the supply of money (pushing interest rates down), national income and the exchange rate (if it is floating) will change so that “the” domestic interest rate ends up equal to “the” world interest rate. There are different implications if the exchange rate is “fixed”. A Mundell-attributed policy prescription for exchange rates, to some extent arising from the insights of this economic model, is the idea that commitment to a fixed exchange rate by a country is a useful policy anchor, as it requires commitment to avoid inflationary over-expansion of the money supply (which has been an important issue ever since world-wide inflation kicked off in the late 1960s and early 1970s, which contributed to the general abandonment of the fixed exchange rates which had been adhered to around the world since the late 1940s). RIP.

(World Currency Observer will next be updated on April 28 and May 4, 2021. 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.)