October 2, 2019 (see October 16 update below). Next update: November 5, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).

Many currencies around the world weakened against the US$ in the first week of September, then picked up strength for the next couple of weeks before weakening again in the last week, but with the net result being upward movement for many currencies against the US$ over the entire month of September. While not all currencies fit this pattern, it can be said more generally that, around the world, the net movements of the vast majority of currencies against the US$, plus or minus, was small. The Mexico peso rose by nearly 2% against the US$ in September, reversing some of the weakness shown in August. The Costa Rica colón fell by just over 2.5% against the US$ in September. The Argentina peso moved up by a net 4% against the US$ in September, leaving it down by over 45% since this time last year (see below for more on the Argentina peso). The Euro (and Euro-led currencies in the rest of Europe and in Africa) declined by nearly 1% against the US$ in September, while the UK pound moved up by 1% against the US$ in September, and by more against the Euro (see below for more on the recent movement of the UK pound). The Turkey lira rose by 3% against the US$ in September, and is up by nearly 6% against the US$ since this time last year. The Russia rouble and the Ukraine hryvnia both fell by around 3.5% against the US$ in September, leaving the rouble down by just over 2%, and the hryvnia down by 14%, since this time last year. The Egypt pound is up by over 9% against the US$ since this time last year after a 1.5% increase in September. The Libya dinar was down by 3.6% against the US$ in September, leaving it down by nearly 2% since this time last year. The Pakistan rupee moved up by nearly 2% in September against the US$, leaving it down by nearly 27% against the US$ since this time last year. Gold and silver prices (US$ based) fell in September, but prices of other key metals (such as zinc) moved up - these movements were not enough to erase the year-over-year decline in industrial metal prices, nor in the year-over-rise of gold and silver prices. Prices of most agricultural commodities rose in September, and oil prices were up by a little more than 3% (more than this for Brent, less than this for WTI), but still down substantially since this time last year.

In the few days prior to the lowering by the US Federal Reserve of US policy interest rates by ¼ of 1% on September 18 (as had happened the week before in Europe when the EC Bank lowered interest rates, there was public disagreement among the deciders regarding whether the move was necessary), overnight rates rose sharply in U.S. financial markets. The sharp increase in overnight rates may have been due to a number of short-term cash needs converging at one time. But it also raised the question of whether cumulative US economic growth is close to reaching the point that it has soaked up the excess bank reserves that are the legacy of years quantitative easing (in a previous issue of the brochure edition of World Currency Observer, it was suggested that this event could prove to be a crossroads for exchange rates of currencies around the world, because of implications for U.S. inflation rates over the next few years). Whatever the case, the sudden tightening, said to have been eased by liquidity injections by the Federal Reserves, was more “justification” for the move by the Fed to put downward pressure on interest rates.

In Argentina, the informal rate of exchange for the Argentina peso per 1$US among exchange houses (the dólar blue) still exists, but the gap between the dólar blue and the official rate (the exchange rate quoted to the public by government-regulated/licenced banks, for which the market generally quotes the rate published by Banco Nación, Argentina’s largest bank) has generally been rather small – it was, of course, often very large prior to the economic policies of the current President (Macri), particularly at times when US dollars were not readily available at the quoted official rates. The gap against official rates have been widening recently, in response to the capital controls recently imposed by the government. Below the official and dólar blue rates is the inter-bank (mayorista) exchange rate for very large transactions (the central bank has established bandas - inferior and superior – around this rate, viewed as the “hardest” peso/1US$ exchange rate, as guides for possible interventions). In addition to the domestic informal market, there is a foreign-based Argentina peso/US$ foreign exchange market for cash transactions, which is very private. And there are other peso/dollar exchange rates, such as those based on Argentina government US dollar-denominated bonds (and other assets as well), which can be bought for pesos and sold for US dollars (or vice versa), yielding unofficial rates of exchange (selling pesos to obtain US dollars) which are currently around 3% above (more pesos for 1$US) the official rate (the government has made moves to restrict activity in this market, which operates in Argentina, and which gives a peso/U$ rate widely known as the MEP rate or as the dólar bolsa). There is also the option of buying Argentina stocks which are quoted in Argentina and New York – buying the stock in pesos locally and selling in New York for US$, the so-called CCL dólar (contado con liquid), which “trades” at around 8% above the official peso exchange rate at any moment in time. While these peso/US$ alternatives exist (and have existed for many years in Argentina), the old period of a domestic Argentina black market in currency exchange with wide spreads against official rates is largely over, particularly in the domestic currency market.

Commentators have been looking for links between movements in the UK pound and the approach of Brexit. After a steady decline against the US$ since March 2019 (and after strengthening in the first few months of the year), the UK pound began to steadily get stronger from the middle of August. There was an abrupt weakening in the first week of September, then the UK pound moved up again, before some weakening again at the end of the month. The pound has moved up by 1% over the entire month of September (even after the weakness of the first and last weeks), and up by 2% since the above mentioned mid-August low. The pound moved up by even more against the Euro over the month of September. Policy makers and others have focused on the volatility of the pound, which traders say has been very high (which creates opportunities for traders). A strong pound is not inconsistent with the idea that Brexit will, overall, be “bad” for the UK economy (the logic being that, without Brexit, the pound would be even stronger), although it does appear to undermine that view.

October 16, 2019 update

News from Lebanon that the Syndicate of Bakery Workers of Beirut and Mount Lebanon went on strike last week (which has since been temporarily halted), due to a lack of enough US dollars at the official rate to import wheat, has led to a lively discussion of why a dollar shortage in Lebanon has developed at this particular time. (Millers import wheat, paying US dollars obtained from the government, and when the US dollars were not available, they needed to be paid by the bakeries and their customers in US$, which, of course, they generally do not have – this is why the bakers, not the millers, went on strike.) The central bank governor was reported to have made remarks suggesting that the shortage is not real, that what happened was lack of adjustment to new procedures for obtaining US dollars, which are intended to curb corruption (such as obtaining dollars at the official rate, and selling them on the black market, which in Lebanon is at small but not insignificant premium above the official rate, which has been fixed at 1507.5/1$US for many years). As in most countries that must contend with dollar shortages (not enough US dollars from exports to pay for essential imports), dollars available to Lebanon businesses and persons are essentially rationed, and sectors faoured for imports include fuel, food and medicine, so the reported inability to obtain US dollars is of real distress. Lebanon has always managed, despite one of the world’s largest debt to GDP ratios, to maintain a delicate balance in the need for US dollars, so it will be interesting in the coming weeks to see what explanations emerge regarding the source of the crisis.

And, of course, in the United Kingdom, the October 31 date for Brexit is fast approaching. WCO’s impression is that financial markets still believe that some type of deal will be reached, so the reaction of the UK pound and the Euro will be strongest if it turns out that no deal is reached, in large part because the UK government has a legislative minority, which inhibits its ability to pass legislation and spending measures.

(World Currency Observer will next be updated on November 5, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).)