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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

January 4, 2017. (see January 18, 2017 update below). Next update: February 1, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).

Among the currencies of the larger economies of the world, the Euro fell around 3% against the US$ in 2016, with a 1% fall in December. The Japan yen fell by nearly 3% in December 2016 against the US$, still recording a 3% rise through all of 2016. The United Kingdom pound fell by nearly 3% in December 2016 against the US$, and by around 19% against the US$ since this time last year, which adds up to a substantial decline against the Euro on the eve of the forthcoming BREXIT negotiations to withdraw from the European Union. The China renminbi yuan fell by 7% on the year against the US dollar - except for the Mongolia togrug and the Papua New Guinea kina, the fall in the yuan was the biggest decline of any major currency in Asia against the US$ in 2016. Many Asian currencies slipped into overall weakness in 2016 against the US$ only because of their weakness in December, which was generally attributed to the impact of the December 14 rise in US Fed interest rates, the only Fed movement of its key interest rates in 2016 (these movements followed, rather than led, changes in market interest rates). While African currencies generally declined in December against the US$ by around 1%, both the Gambia dalasi and the South Africa rand moved up. The South Africa rand is up more than 11% on a year ago.

The Russia rouble started 2016 at 75/1$US, and finished at around 61, a 16% appreciation against the US$, which included a 7% appreciation in December. This can be compared to the other large former-USSR country, Ukraine, where the hryvnia fell by more than 18% in 2016 against the US$, implying a more-than-30% decline against the Russia rouble. Ukraine has just nationalised its largest bank, Privatbank, where capital shortfalls had put at risk the savings of millions of depositors, and whose collapse would have had devastating consequences for the Ukraine financial system and for the economy–the move was lauded by the International Monetary Fund. An English-language statement by the central bank governor of Ukraine was very frank in identifying the major problem: it said that, at one point in time, “related-party loans accounted for 97% of the bank’s loan portfolio” –in other words, a major problem was corrupt lending practices.

In North America, the Mexico peso was down 20% on the year against the US dollar; the Iceland krone was up nearly 12% on the year and the Canada dollar rose by nearly 3%. The Canada dollar and Iceland krone each weakened a little against the US$ in December 2016. The Brazil real rose 6% in December, and was up by nearly 18% in 2016 as a whole. The Venezuela bolivar fuerte was down 60% on the year, and the Argentina peso fell by 22% in 2016 (see below). World oil prices rose by nearly 50% in 2016, pushing above $50/barrel for the first time in October 2016, and are expected to head to $60 and above in early 2017. There were large double-digit percentage increases in a broad range of metal and agriculture commodities in 2016, but there were 2016 price declines in maize (corn) and wheat, which are two of the most important grains. Among tropical commodities, cocoa and pepper prices fell strongly in 2016, while rice prices rose by about 4%. There was a very strong upward movement in December by Malaysian rubber prices, leaving the price nearly 60% higher than a year ago. The US$ price of the bitcoin, the digital currency, more than doubled in 2016, and is now above US$1000/bitcoin.

In India, the rupee remained basically stable, in the wake of the 2016 move by the India government, to force holders of large amounts of the rupee larger-currency-bills (and, of course, affecting smaller holders as well) to deposit their cash in the banking system, an attempt to open up and to reduce the underground economy, by revealing the identity of major participants. One issue which the Indian government had to deal with over the last two months: the resulting massive deposits of rupee bills into banks dramatically increased bank liquidity. This could have substantially reduced short-term interest rates, which could in turn have resulted in a big drop in the rupee. Among the measures the India government took to “mop up” this liquidity was requiring banks to increase the amount of reserves they must maintain on deposit with the Reserve Bank of India.

The Turkey lira was down around 3 1/2% in December against the US$ and by 21% on the year. Among the many countries coping with the strength of the US dollar against their currencies, Turkey was perhaps a standout, with measures such as requirements for state agencies and other bodies to convert foreign currency holdings into lira. The Turkish president also mentioned the possibility of bilateral trade deals to be undertaken using only the currencies of the two countries involved, bypassing the customary use of the US dollar. This possibility has also been mentioned by Russia, although Russia’s motivation is thought to be based more on anti-American sentiment rather than the financial considerations of countries such as Turkey.

Argentina peso: In the middle of December 2016, a 5% gap opened up between the official peso exchange rate (the dólar oficial) and the still-existing parallel market rate (the dólar blue). Contributing to the December gap was a downward movement in the official peso rate in the last part of December 2016, attributed to efecto blanqueo-the large-scale repatriation to Argentina of personal foreign currency holdings, pursuant to the terms of the July 2016 tax amnesty law (Ley Blanqueo de Capitales). Among measures to cope with the inflows of foreign currency related to efecto blanqueo, there are reports that the Banco Central increased the permitted foreign currency holdings of financial institutions. The dólar blue currently remains around 5% higher (pesos/US$) than the official rate, and touched 17/US$ at one point. Overall, in 2016, the peso fell by 22% against the US$, which was after the official peso was raised in late 2015 to eliminate the gap with the parallel rate. There were also big developments at the political level in Argentina in December, including the dismissal of the Minister of Finance (along with a split of the Finance Ministry into two Ministries), and the indictment of former President Cristina Fernández de Kirchner on corruption charges. Argentina continues to have some of the highest inflation rates and interest rates in the world, and is in economic recession.

January 18, 2017 update

The Bank for International Settlements issued its Report on the October 7/16 “flash crash” of the United Kingdom pound sterling, the episode where, in a period of around 15 minutes just after midnight on that day, the US$ per pound exchange rate plunged from 1.26/pound to the 1.20-1.22 range (although there was one trade recorded at 1.1491/pound), and then moved back to 1.24 (the following week, on October 10/16, sterling was at around US$1.22/pound). There were also similar movements in the foreign exchange futures market during the flash crash episode. As of January 18/17, around three months since the crash, the pound is at 1.24, having touched 1.20 at one point earlier this week, on the eve of a major speech by United Kingdom Prime Minister May on BREXIT.

WCO remarks that the BIS Report is good (eloquent would be a better word) at describing what happened during the flash crash, but does not penetrate the behaviour of market participants, to single out triggers and actions of market participants. (The foreign exchange market for the major currencies is highly competitive, with many participants and thin profit margins, so participants could not be expected to be too forthcoming on proprietary information, the release of which would damage their competitiveness and put them out of business.) The Report, instead, points to a number of factors contributing to the crash, such as a temporary lack of sufficient numbers of buyers of the pound when it was falling sharply, which was, to some extent, due to over-reliance on computer driven trading algorithms during the midnight hour (7:00 in New York), when many managers were off-duty. It absolves the London Financial Times from causing the movement (it innocently released a newspaper article in the middle of the flash crash), because the downward movement had already started, but unkindly suggests it may have helped “exacerbate the [already] existing volatility”. Market contacts interviewed for the BIS Report have since pointed to other candidate triggers: for example, a so-called ‘fat finger’ trade in the form of a deliberate attempt to move the price lower during a typically illiquid period, or Asian retail trading in sterling. But, the Report notes, in each case market participants were unable to offer definitive evidence to substantiate these hypotheses (see remark above on proprietary information). WCO adds that the Report contributes some interesting insights on the structure of foreign exchange markets, such as: movement toward “equity-like” trading structures for major currencies; the multitude of trading platforms (60-70) and a remark that price discovery takes place on a narrow range of these platforms; and the complex web of multilateral and bilateral arrangements among market participants.

World Currency Observer will next be updated on February 1, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).