December 2, 2014 (See December 16 update below. Next update: January 2, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)
The Euro is down over 9% on the US dollar since a year ago. The yen has fallen nearly 16% against the US dollar over the last year, with one result being that most other Asian currencies, because they have fallen by less against the US$, have gone up against the yen. (Japan is expanding its quantitative-easing money policy program). The Mexican peso is down nearly 3% on the month, and by almost 7% since one year ago. The Canadian dollar is down 8% from a year ago against the US$. The Russian rouble has moved from 33/US$ to 47/US$ over the last year - the Russian central bank says the rouble has been floating since mid-November, roughly six months ahead of the previously-planned 2015 target for movement from a trading band to a free float. The Ukraine hryvnia was at 8/US$ a year ago, and is now at 15/US$. The Nigerian naira (a major African petro-currency) is down over 6% over the month, and more than 11% since a year ago. United States natural gas prices, somewhat isolated from the fluctuations in European gas prices caused by developments in Russia, are up around 3% since this time last year. Gold prices are down nearly 6% since this time last year.
The event affecting exchange rates in every country is the plunge in oil prices. To look at the evolution of one very useful indicator of oil prices, the OPEC basket price of crude oil (consisting of Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).): it hovered at aroundUS$105/bbl at the beginning of summer, then moved down $5/bbl throughout August, and down another $5 by the end of September (to just under $95). The downward movement accelerated in October, with a $12 fall to U$83/bbl, and then there was an additional $10+ fall in November to around US$70/bbl. As a confirmation that the price reduction is here to stay for the time being, there is the OPEC announcement last week that, despite the drop, it will not adjust downward its production targets. This, however, is consistent with a view that the price has fallen so far that production at higher cost fields around the world will eventually become unprofitable, which will choke off supply, putting a floor under the price, and may even push the price back up at some point. But, for now, since this time last year, there has been a 35% reduction in the price of the world’s most important commodity (sorry, gold), and entities around the world, from the world’s biggest multinational companies and governments, to the average household, are calculating the implications of the oil price reduction. Prior to the recent fall in oil prices, the increased supply in the United States (largely from the application of new technology to shale rock formations) had led to a reduction in US oil imports, with the biggest impact on African producers, particularly Nigeria. Among the impacts of the oil price decline: reductions in government revenues in petroleum producing countries, reduced oil bills for oil importers, and reductions in the costs of fuel subsidies in some of the world’s most populous countries. And, one interesting impact is that the resulting deflation caused by the fall in such an important price will imply reactions in countries that have linked their monetary policy to deflation developments (such as the EU). So the result of the oil-price changes will be a series of very complicated movements in most exchange rates in the weeks ahead.
December 16, 2014 update
The Bank of Russia raised all of its interest rates by 6.5% on Monday, to the 18% range. With inflation of around 10% in November, and the very steep one-day decline in the rouble early in the week, these interest rate changes can be best interpreted as movement by Russia against what it views as a speculative attack on the rouble. Earlier this month, the President of Russia, against a backdrop of what were, even then, sharp declines in the value of the rouble, made some comments on currency speculators (спекулянты, spekulyanty) in a speech to the Russian nation on December 4, as follows: “Today we are faced with reduced foreign exchange proceeds and, as a consequence, with a weaker national currency, the rouble. As you are aware, the Bank of Russia has switched to a floating exchange rate, but this does not mean that the Bank of Russia has withdrawn from controlling the exchange rate, and that the rouble may now be the object of unchecked financial speculation. I’d like to ask the Bank of Russia and the Government to carry out tough and concerted actions to discourage the so-called speculators from playing on fluctuations of the Russian currency. In this regard, I’d like to point out that the authorities know who these speculators are. We have the proper instruments of influence, and the time is ripe to use them.” Follow-up comments from Russian officials raised the issue of whether it is believed that the speculators in question are resident in Russia, and therefore subject to Russian criminal code measures against speculation (“market manipulation”); or whether they are offshore, in which case they can be “punished” by government exchange rate interventions aimed at inflicting financial losses on them (which can backfire against the government if the market is too strong). WCO remarks that some Russian officials have pointed out that speculation is not necessarily bad. But Russian attitudes to speculators may reflect the laws of the former USSR, which made speculation a criminal offense with severe punishments. Also in play is finger-pointing at Russian banks, and official concern about the amount of foreign currency denominated debt issued by Russians. There have been announcements that a coordinated Russian government analysis of currency speculation is under way, with the participation of a broad range of government departments and agencies, and a report is to be ready by December 19.
(World Currency Observer will next be updated on January 2, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)