March 3, 2015 (See March 17 update below. Next update: April 1, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)
WCO is still evaluating January 2015 and February 2015 changes in currencies around the world after the events over these two months, and presents some highlights below.
The Euro, after falling over 20% against the US$ since this time last year, showed little additional change in February, after the 7% fall in January. The Japanese yen, down 17% since this time last year against the US$, was down another 2% on the month. Oil prices, showing much more divergence since the beginning of 2015 between US and rest-of-world prices, were generally up around 20% on the month, but are still ½ of what they were one year ago. The Brazil real is down 7% on a month ago against the US$, and down 23% since a year ago, far exceeding the movements in other South American currencies in these time periods. The Libyan dinar is down around 6% on the month against the US$, and just under 10% on the year. The Indian rupee is at the same level it was a year ago. The Singapore dollar is down 7% since this time last year (also down is the Singapore-dollar-linked Brunei dollar). The Chinese yuan is down around 2% on the year (there has been much commentary about perceptions of an easing in the still-rapid pace of growth of the Chinese economy). The Nigeria naira is down 7% on the month – its downward movement over the last year, around 23%, is not out of line with movements in many other African countries (Nigeria was recognised a year ago to be Africa’s biggest economy).
Among the countries of the former USSR, there was a large, downward movement on the month in the Azerbaijan manat (catching up to previous movements in the Russian rouble), the Moldova leu and, of course, in the Ukraine currency, the hryvnia. The Russian rouble was up more than 12% on the month against the US$, but is still down more than 69% on the year (from 36/US$ to around 61).
The Swiss franc is down over 8% over last year against the US$ and down over 3% on the month, which puts in perspective the big upward movement of the Swiss franc against the Euro since last year. Beside the impact on trade and services flow in Europe because of the Swiss franc/Euro change, there are fears of risks to the banking sectors of Eastern European countries, as many clients in these countries took out low interest-rate Swiss franc mortgages and loans, and are now faced with additional payments due to the strength of the Swiss franc against the Euro, and thus against other Euro-linked currencies in Eastern Europe, some of whose economies are weak, making the potential problem worse. The number of standard-sized home mortgages involved is perhaps around 2 million, but there are additional Swiss franc business loans, the size of which is often more difficult to quantify. Hungary, the country with most of the Swiss franc mortgage loans, recognised the potential problem last year, and moved to denominate Swiss franc mortgages in the Hungarian currency, the forint (see the October 2014 WCO). After the January appreciation of the Swiss franc against the Euro, other Eastern European countries assessed this issue and most concluded that its impact on their own local financial sector would be manageable. One exception is Croatia (the kuna is tied to the Euro), where the number of Swiss franc mortgages is proportionately large (around sixty thousand), and the financial burden is compounded by years of recession. Croatia has capped for one year, beginning January 27 2015, at 6.39 kuna/Swiss franc, the kuna payments to be made by Croatians with debt denominated in Swiss francs (the current level is around 7.2/Swiss franc). At this point, the exchange loss is to be borne by lending institutions, the banks in Croatia, whom Croatian politicians are blaming for making the loans in the first place.
In the European Union, Greece has been given a 4 month extension of its existing bailout package, but there appears to be general pessimism with regard to whether Greece will agree to accept even more austerity, which is likely to be required for a new low-interest-rate loan program. Earlier in February, in the context of its quantitative easing monetary stimulus program (which begins in March) the European Central Bank excluded full Greece participation, by deciding to strictly enforce its minimum credit rating for government bonds, thereby lifting a waiver it had given to Greek bonds. There have been media reports and blog entries discussing the theoretical possibility of Greece issuing Euro-denominated debt to make selected payments, such as pensions and services to government. If so, this debt would operate something like a parallel currency - Euro-denominated and Greece-issued-and-backed - which would trade at a discount to the Euro.
March 17, 2015 update
The large changes in key exchange rates over the last two months have made an important contribution to the emergence of negative interest rates in the world deflation environment. They have made negative interest rates more acceptable to investors, who will accept a negative interest rate if they take a view that the underlying currency will move up, giving them a positive return. Also, the negative yields are found (for the moment) on shorter-term instruments (bank deposits and short-term bonds), which have the biggest capital flow influence on exchange rates. In instances of negative interest rate bank deposits, depositors are paying service charges for the right to put their money in a bank, although some of the benefits are fairly clear, such as the safety of putting money in solid well-capitalised institutions, and access to payment mechanisms, such as cheques. What is unusual here is that negative rates are happening for large, high quality commercial deposits (e.g, $1 million or more). For negative interest rate bonds, negative interest rate situations involve the sale of positive interest bonds at a price high enough that the initial capital loss is not offset by the lifetime of positive coupon payments, so that the yield to maturity is negative.
(World Currency Observer will next be updated on April 1, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)