August 1, 2018 (see August 15 update below). Next updates: August 29 and September 5, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Mexico peso, continuing an upward trend against the US$ that began in the middle of June, rose by more than 6% against the US$ in July (this movement by the peso is very striking, when viewed in contrast with currency movements in other countries). Both the Canada dollar and the Iceland króna also were up against the US$ in July, although nowhere near to matching the Mexico peso move. After falling in June, the Jamaica dollar showed a further 1.9% fall in July against the US$, leaving it down nearly 4.5% against the US$ since this time last year. The Trinidad and Tobago dollar rose by nearly 2.4% against the US$ in July. South America currencies generally showed strength against the US$ in July, with the Brazil peso up by 3.5% in July (although down by nearly 18.5% since this time last year.) The Paraguay guarani fell by nearly 1% against the US$ in July, giving back the gain it made in June, leaving it down by 3.3% against the US$ since this time last year. The Euro rose a little against the US$ in July, and the Sweden krona rose by 2.2% in July against the US$ (still down nearly 8% since this time last year), while the United Kingdom pound weakened slightly. East Europe currencies were generally stronger against the US$ in July; but the Turkey lira fell by around 6.5% against the US$ in July, leaving it down by nearly 40% against the US$ since this time last year (there is some feeling that Turkey should have moved to raise its interest rates). The Tajikistan somoni fell by nearly 3% against the US$ in July; the Ukraine hryvnia fell by 1.9% in July, leaving it down just over 4% against the US$ since this time last year. The Russia rouble rose by 1% against the US$ in July. The Iran rial (unified rate) fell by 3.7% against the US$ in July (see below), and the Libya dinar fell by 1.5%. Africa currencies generally showed strength against the US$ in July. The South Africa rand rose sharply by more than 4% in July against the US$, reversing around half of its June decline, and leaving it down by 1% against the US$ since this time last year. The Uganda shilling rose by nearly 5% in July, and the Angola kwanza fell by more than 3% against the US$. The Tunisia dinar fell by just over 2% against the US$ in July, leaving it down around 11.5% since this time last year. With major Asian currencies generally down a little against the US$ in July (such as the Japan yen, South Korea won, and Indonesia ringgit, a standout was the 3% decline in the China yuan against the US$ in July (this has drawn some comments in the United States regarding currency manipulation). The Pakistan rupee jumped abruptly at the end of the month, so it finished July down by just under 3% against the US$ during the month (see below for more on the rupee). Worldwide oil prices declined in July, but are still up around 40% from a year ago. Metals and tropical commodity prices declined in July, while world soybean, wheat and maize prices generally rose.

WCO read with interest several articles on Iran’s currency situation by Maziar Motamedi (published in Al-Monitor), our attention having been drawn by a headline suggesting that Iran now has, in effect four currencies (after starting with two), due to segmentation of Iranians who want foreign exchange into four groups, each with its own exchange rate: essential goods, raw materials and inputs, less essential goods, and a residual free market (actually a black market, as transactions in the free market are to some extent prohibited and/or discouraged - please note that a black market exchange rate is not always the same as a free market rate). Iranians who have earned foreign currency and want to convert into rials (including oil exporters and also the very large sector of non-oil exporters) are “directed” towards one of the four sectors. Which one of the four exchange rates is closest to what would be a “true” rate, i.e., the exchange rate that would equilibrate foreign exchange demand and supply by Iran in a truly free market (one which presumably would not include the impact of current and forthcoming economic sanctions)? A complicating factor is that Iran is a major oil exporter and also a major exporter of non-petroleum goods and services, so it is not starved of foreign exchange, which is unlike some smaller and poorer countries elsewhere in the world. Also, the rate of inflation in Iran is around 10 per cent, setting the underlying trend for riyal depreciation against other currencies of the world. Given these factors, it would be hard to say what would be the “true” exchange rate for the rial. At present, black market exchange rates are reported to be at least 100,000 rials/1$US on the streets of Tehran (90,000 may be a better approximation of a more widely used parallel rate), and the unified official rate is 44,000 (from the central bank of Iran), with other Iran exchange rates lying in between these rates.

News headlines that the new government of Pakistan is requesting financing from the International Monetary Fund to offset weakness in the rupee fits in with the observation that the Pakistan rupee to India rupee ratio (which started at 1:1 back at the time of partition in 1947) has moved sharply above the 1.65 ratio of early 2017, during a one year period which has been marked by four sharp rupee depreciations (which some characterise as devaluations, arguing that the free-floating Pakistan rupee is, in reality, pegged to the US$), and by a dramatic upward movement at the end of July - time will tell if this reversal holds, but it has been reinforced by news of a US$2 billion loan from China.

The latest US GDP figures, with growth of 4.1% (annualised) in the 2nd quarter of 2018, will put upward pressure on US interest rates, and the growth/higher-interest-rate combination will certainly will give strength to the US dollar against all the other currencies of the world. The other half of the story for each currency will be developments in individual countries, a reminder that every currency has its own influences which are homegrown and strictly their own. An important influence is going to be the trade war, with more indications that individual countries (such as China) will turn to domestic stimulus to replace the economic activity lost due to restrictions on exports and imports. Another impact will be the diversion of demand to other countries – one well identified effect will be a shift of China demand for soybeans, from the United State to Brazil soybeans.

Venezuela has announced it is going to call in its currency, currently at around 3.6 million bolivars per 1$US in the black market and falling fast due to hyperinflation, and replace it with something with less zeroes (commonly defined as redenomination or revaluation). Redenomination has occurred many times in history, and always has distribution effects, particularly in a hyperinflation environment, with the losers being those who have held on to the old currency for too long, as the conversion ratio generally fixates on prices of the day of conversions. An example of a policy to try to handle this dilemma was in those parts of southeast Asia occupied by Japan during World War II, which were required to use Japan military scrip as money during the war (usually called “Banana Money”), and which then were converted back to local currencies at the end of the war, using conversion ratios which depended upon the date of issue of each piece of military scrip which was handed in. It was a messy process which took a while to resolve.

August 15, 2018 update

The US released (August 8) its 2nd tranche list of 25% tariffs on China exports to the United States ($16 billion more in value, bringing the total to $50 billion in exports affected, with more tariffs threatened). China said it will complete its retaliation (August 23) against the US imposition of $50 billion in tariffs with the announcement of 25% tariffs on $16 billion of US exports to China (there is a view that China has been very targeted in its selection of products for retaliation, such as focusing on major US agricultural exports from states which supported President Trump in the last presidential election). There is apparently no conversation at present between China and the United States to resolve the trade war, the next round of which could be US tariffs (25%, up from a previous target of 10%) on a further US$200 billion in China exports – China responded by saying it is working on a US$60 billion list. The US completed its re-imposition of nuclear bomb-related sanctions on Iran on August 7, which included a sanction against Iran using US paper currency. (Regarding the Iran sanctions, the European Union has issued a Blocking Sanction, intended to nullify the impact on EU companies of the US sanctions against Iran). With regard to Turkey, President Trump published a Twitter tweet (August 10) which said: ”I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!” Canada also released a tweet (August 2), protesting the Saudi Arabia arrest of a political activist related to a Canadian citizen, and Saudi Arabia retaliated with measures which include the forthcoming suspension of trade and business ties between Canada and Saudi Arabia (but not the sale to Canada of Saudi oil).

Usually, when there is an official and a black (parallel) market rate, it is the official rate which eventually disappears, when it decreases in value, moving to the level of the black market rate. But, in Ethiopia, in the first 100+ days of a new Prime Minister (Ahmed), the opposite has happened: the parallel rate has moved (increased in value) from around 35 birr/$1US, to become close to the official rate of around 27.5/1$US. More on what happened (which included normalisation of relations with Eritrea in support of a peace deal, a massive capital inflow from the United Arab Emirates, and an appeal to the patriotism of Ethiopia’s citizens), and why, in the next WCO update.

(World Currency Observer will next be updated on August 29 and September 5, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)