Headline for .     Since the beginning of 2018, despite the Covid-19 pandemic, currencies around the world are generally down against the United States dollar.     
World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

June 1, 2022. (see June 15 and June 22 updates below). Next update: July 4, 2022. Visit Search to look at past issues of World Currency Observer (brochure edition).

Exchange rate movements in May 2022 were against a background of expected future rises in interest rates (led by the United States, and also still awaiting a possible interest rate upward move in late July by the European Union), continuing high oil prices, and increases in key commodity prices, especially those directly affected by the Russia-Ukraine war. With the notable exception of China, which is just coming out of an economic lockdown, Covid-19 influences appear to be moving toward the direct sickness and mortality effects (still very substantial in the United States and elsewhere), moving away from the economy wide impacts of economic shutdowns over the last two years (as mentioned, the big recent exception is China), but there is no mistaking that the Covid-19 impact continues to be strong, particularly for the availability of labor.

A number of currencies weakened in the first part of May against the US dollar in May, but then reversed, registering net upward movements over the entire month of May against the US$. The Mexico peso rose by nearly 3.5% against the US$ in May 2022, and the Iceland krona was up by nearly 2.5%. The Haiti gourde moved down by 2.5 % against the US$ in April, and is now down by 19% from its pre-pandemic value (there was a very interesting section in the May 22 New York Times, outlining Haiti-France financial relations in the 19th and 20th centuries, and an analysis of their legacy for the economic development of Haiti, still being felt today). The Costa Rica colón fell by more than 2% in May 2022 against the US$. The Argentina peso is down by 100% from its pre-pandemic level, from 60/1$US to its current value of around 120. The Brazil peso showed a net upward movement of 4% in May. Many currencies around the world weakened in the first two weeks of May 2022 against the US$, but then moved up, finishing the month stronger against the US$ - the Euro, for example, showed a net upward movement against the US$ of nearly 2%. The Turkey lira fell by 10% against the US$ in May 2022, and is now down by more than 90% since this time last year. The Hungary forint fell by 2% in May (down 23% from its pre-pandemic level against the US$). The Ghana cedi fell by more than 4% against the US$ in May, and is down by more than 32% since this time last year (down by 34% from its value before the pandemic). The Uganda shilling was down by nearly 5% in May vis-à-vis the US$, and is down by 2% from its pre-pandemic value. The São Tomé and Príncipe dobra was down by 3.5% in May (down 5.5% from its pre-pandemic US dollar value). After several months of weakness against the US$, the Japan yen turned around in May 2022, rising by 1% against the US$ (down by 17% from its pre-pandemic level). The China yuan fell by 1% in US dollar terms in May, and is up by more than 4% against the US$ from its value before the pandemic. The Laos kip was down by nearly 9% in US$ terms in May (down by 50% from its pre-pandemic level). The Sri Lanka rupee is down by 94% from its pre-pandemic US$ value, and the Pakistan rupee fell by nearly 7.5% in May 2022. Prices of metals, in US$ terms, weakened in May. Wheat prices (whose exports and planting are linked to the Russia-Ukraine war, including shipments from ports on the Black Sea) moved up in May, but prices have still, so far, been relatively flat since their 35% rise early in March after the invasion (but there are some suggestions that wheat prices will move upward sharply in the middle of the summer). Rice prices were up by 7.5% in May (up by 5% from their pre-pandemic level, and coffee prices increased by 4% (up by 71% from their pre-pandemic level). WCO remarks that agricultural price movements continued to be mixed. World oil prices continue to be at the high they reached in early March.

An interesting commodity price development, illustrating the world production/export nexus, was the May announcement that India is banning exports of its wheat, which will reduce upward domestic inflation pressures. But, while India is one of the world’s largest producers of wheat, its exports are small in relation to the size of world exports, so the impact of the India move on world wheat prices is expected to be limited.

The Russia rouble strengthened through May 2022, to such an extent that the central bank was in a position to continue to reverse most of the very large interest rate hikes which took place in early March – the Russia key interest rate was lowered by 300 basis points, to 11%, on May 26, and it is now fairly close to the 9.5% level it was at before the economic and financial sanctions imposed in connection with Russia military operations in Ukraine (which, in the understanding of WCO, show little sign of being wrapped up any time soon). The Moldova leu and Ukraine hryvnia both weakened in May, while the currencies of the other former USSR countries all showed varying degrees of strength.

WCO is beginning to see more comments about the International Monetary Fund March 30/22 statement, which indicated that the IMF will be viewing with greater “understanding” (hard to find another one word characterization of the IMF self-described “revision of the IMF 2012 Institutional View”) measures undertaken by countries to manage their capital inflows and outflows, which of course are the most volatile and quick-moving of all of the influences on exchange rates, because they are very large and very quick to react (capital flows are financial transactions between residents and non-residents). IMF approval is not required for capital control measures by sovereign countries, but IMF views are influential, as they are part of the periodic reviews of country policies undertaken by the IMF, which can form part of the assessments undertaken in connection with the assessments for financial aid And, even for those countries who will not be receiving IMF aid (the highly developed countries), IMF assessments are politically influential, such as for those countries which have taken measures to manage inflows of real estate investment, which are seen as distorting the prices paid by their citizens for housing (which have implications for income distribution, monetary policy and so on). While the comments that WCO has seen in the last few weeks generally (and gently) suggest that the IMF March 30 statement has not been permissive enough regarding country management of capital flows, the IMF has been engaged in a worldwide dialogue on these issues for at least the last thirty years, and has been an important participant in the evolution of views on capital controls. Over that time, the world has moved away, (particularly since the global financial crisis of 2008), from the attitude that all capital controls are distortions which should be removed (based to some extent on the idea that financial markets “work”, and that free capital flows are part of how economic variables, such as exchange rates, adjust), to the view that, in a wider set of circumstances than before, capital movements can be harmful, such as “financial amplifications” that worsen problems (e.g, exchange rate depreciations that move too far, increasing the costs of servicing external debt, mispricing imports and exports, etc.). There are also many issues related to capital controls which are important to policy makers but are not always large enough in volume to have substantial effects on exchange rates, which include: ensuring that citizens do not take on too much foreign currency debt; combating tax evasion and flows of criminal funds; and foreign investment restrictions linked to views on market concentration. Other capital control issues include: short-term versus long-term restrictions; different restrictions among short versus loner maturity issues; and bank deposits versus corporate paper versus government paper.

In Nigeria, as part of the multiple windows structure of the Nigeria exchange rate (the naira), it has now been one year since the NAFEX rate has been explicitly the official value of the naira quoted by the central bank. The major source of foreign exchange for Nigeria is, by far, petroleum and natural gas (and other petroleum gas) exports (90% of foreign exchange) The foreign exchange windows (foreign exchange bought and sold) include: the I&E (NAFEX) window where forex is traded between exporters, investors, and purchasers of forex (including oil and gas); the SMEIS window, where forex is sold to importers; the BDC window which is where forex is sold to retailers; and other windows with less volume. There is also a parallel market for transactions outside these windows. Nigeria exports a lot of crude, but there is a general view that it refines far too little of its product in the country, to the extent that there are many small refineries operating in a kind of parallel refining sector. WCO remarks that many people think that, in general, parallel foreign exchange markets are free markets, and that the parallel rate is the “true” exchange rate, but parallel markets are often more properly viewed as the residual foreign exchange markets.

June 15, 2022 update

Interest rates around the world are being raised due to higher inflation, and the differing timing of these increases among countries creates pressures on exchange rates. Among jurisdictions and countries with news of interest rate increases (all of which are due to increases in rates of inflation, however measured and broken down between specific commodities and services), is the European Union, where the European central bank will raise its three key interest rates in July, in the face of inflation in excess of 8% - the EU formal statement of intent on this does not cite, as an influence on its rate setting decision, movements in the Euro. Taking a different course is Japan (see below). An important international influence on measured rates of inflation is the renewed increase in oil prices, which have reached a new peak, despite OPEC indications of increases in production. Russia has cuts its interest rates by a further 1.5% on June 2 (to 9.5%), while Ukraine increased its key policy interest rate by 15%, to 25%. (Ukraine has had to be careful in management of the conversion of the hryvnia into foreign currencies, managing the demand for conversion by refugees to other countries against the need to conserve its foreign reserves). There are expressions of fear of a global food crisis, due to halts in shipments of Ukraine wheat – the combination of high energy prices and high food prices (which are the two most important imports for many countries) is generally being linked to the Russia “operation” in Ukraine

There has been some focus on the english translation of a bullet in a June 10/2022 joint statement by Japan: “最近の為替市場では、急速な円安の進行が見られ、憂慮している” (“we are worried about the rapid depreciation of the yen”), issued jointly by the Bank of Japan, (Japan) Department of Finance and the (Japan) Financial Services Agency. Pursuant to this statement, we will, of course, see if there is any subsequent strengthening of the yen, particularly in light of the fact that the yen has reached a multi-year low against the US dollar. But what WCO also found interesting was a June 2/2022 speech, with insights into Japan thinking on yen movement. Excerpts from the June 2 speech are as follows, which analyze the recent inflation rate in Japan, and the implications of yen weakness for the Japan economy: “The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) for April 2022, which was released on May 20, rose to 2.1 percent. This may appear as if it has reached the Bank's 2 percent price stability target, but about 1.5 percentage points of this increase was attributable to the rise in energy prices, such as for crude oil. The rate of increase when excluding such factors that are subject to large fluctuations and disregarding the effects of the reduction in mobile phone charges, which measures the underlying trend in inflation, remained at only around 1.0 percent (Chart 8). In other words, Japan's economy is currently still only halfway to achieving the 2 percent price stability target.” And another excerpt: “First, monetary policy should focus on the underlying trend in inflation and aim to keep it stable at around 2 percent. As I mentioned earlier, the year-on-year rate of increase in the CPI when adjusted to measure the underlying trend has been at around 1.0 percent recently. From the perspective of achieving the 2 percent price stability target, I think it is premature to revise the direction of monetary policy toward tightening. To begin with, exchange rates are not directly controlled by monetary policy. They constitute a category of asset prices and could fluctuate significantly in the short term due to market speculation or the positioning of investors. If monetary policy addresses such short-term fluctuations and puts off achievement of the target for the underlying trend in inflation, this could have an adverse impact on Japan's economy. Crude oil prices, like exchange rates, are also not subject to direct control by monetary policy. Their developments are predominately determined by global supply and demand conditions. If the direction of monetary policy is changed toward tightening to combat higher energy prices in Japan that reflect rising crude oil prices, this may lead to a contraction in domestic demand. However, as global supply and demand conditions are expected to remain tight, crude oil prices will likely stay high. Therefore, such a change in direction would make living conditions in Japan even more difficult. Since I touched on foreign exchange rates earlier, let me conclude by stepping away from the subject of future conduct of monetary policy and introducing another perspective on the relationship between exchange rates and Japan's economy. Looking back, we must not forget that the yen's appreciation served as a factor that triggered Japan's slip into prolonged deflation from the latter half of the 1990s, which in turn exacerbated the "lost two decades." I admit that the deflation was also driven by the impact of global structural changes -- specifically, the rise of emerging economies. At the same time, it is undeniable that the protracted deflation was caused by a prolonged and significant appreciation of the yen. The appreciation induced many Japanese manufacturers to shift their production sites overseas, which in turn sapped the strength of regional economies in Japan and triggered job losses and wage declines. By contrast, the reversal of the yen's appreciation since 2013 presumably has had the effect of encouraging Japanese manufacturers to transfer their production sites back home. I believe that such developments in the establishment of a corporate presence, including in terms of where Japanese firms locate their production sites and other business facilities, are of importance in considering Japan's future economic growth. In any case, when examining the impact of exchange rates on economic activity and prices, it is important, in my view, to not only take into account the short-term impact in the narrow sense, but also have a long-term perspective.

June 22, 2022 update

Malawi adjusted one of the values of its currency, the kwacha, at the end of May. Malawi is one of many countries which ran fiscal deficits because of Covid-19, but, as a lower income country, does not have unlimited access to world financial markets, and must now make fiscal and monetary adjustments. The currency adjustment was made as Malawi faced downward pressure on the kwacha, as evidence by a widening gap between the “official” and “parallel” rates (the meaning of these terms in the context of Malawi is described below), to which the central bank had been reacting to by spending reserves to support the currency, and by re-introducing (August 2021) a requirement that 30% of all exports proceeds in foreign currency be converted into kwachas. Malawi, (population around 19 million), is an inland oil-and-coal-importing Africa country with close trading ties to South Africa, and whose principal exports are tobacco (for which it has been facing overall worldwide reductions in demand, lowering its exports, another reason for the adjustment), tea and sugar. The structure of the Malawi kwacha is based on two kwacha quotations: the authorized dealer (bank-quoted) value, the ADB TT (telegraphic transfer) rate, and which represents around 25% of in-country transactions, mainly bank deposit-based; and the cash rate of the kwacha, quoted and managed primarily by the Foreign Exchange Bureaux (currency dealers), which represents the remaining 75% of transactions, and which is the exchange rate used for everyday transactions (such as prices quoted in stores and restaurants). On May 27, the Malawi central bank announced that the ADB rate would be adjusted to the parallel Foreign Exchange Bureaux rate, moving from 825/1$US, where it has been at since the start of 2022 (it was at around 740 before the pandemic) to 1031, where it has been since, a movement of 25%. (In December 2021, the IMF had suggested, in a country review of Malawi, that a 30% reduction in the inflation-adjusted exchange rate would be appropriate, in that it would balance export competitiveness with reduction in growth of exports).

(World Currency Observer will next be updated on July 4, 2022. 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.)