August 5, 2015 (see August 19 update below). Next update: September 2, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).
The Euro fell a further 1% against the US$ in July, and there was no net monthly movement by the yen in July–both currencies are down about 21% since this time last year. The Haiti gourde fell over 7% last month, and is down over 22% since this time last year. In South America, the Colombia peso fell over 11% on the month, and over 50% since this time last year. The Brazil real declined by 9% on the month, and is also down by over 50% since this time last year against the US$. The Swiss franc declined by 7% on the month against the Euro, but is still 13% higher against the Euro since this time last year. The Egypt pound is down 9% since last year against the US$, and the Israel shekel is down almost 10% against the US$ since last year. In Africa, the Ghana cedi rose by nearly 18% in July against the US$, and the Guinea franc is up 4% on the month. The Madagascar franc and the Malawi kwacha are down over 11% against the US$ during July. The Australia dollar is down by 4% in July against the US$. The South Korea won is down 3.5% on the month against the US$, and off 12% since this time last year. The Myanmar kyat is down 11% in July, and down nearly 28% since this time last year against the US$. In commodity markets, among the exceptions to large downward price movements (US$/commodity) since this time last year are world cocoa and cotton prices, which are roughly where they were at this time last year .
The Mexico peso moved sharply upwards on the last day of July against the US$, with the Bank of Mexico announcing it was dipping into its foreign exchange reserves to expand its program of daily foreign exchange market intervention (the sale of US dollars for pesos) during August and September (“se incrementa de 52 a 200 millones”), and that it would also continue special auctions of US dollars (the purchase of pesos), to be held when the peso weakens more than 1% (formerly 1.5%) during a trading session (“el precio mínimo será el equivalente al tipo de cambio FIX determinado el día hábil anterior incrementado en 1%”). The Mexican peso is at around 16.3/US$.
Venezuela oil revenues are about 95 per cent of the value of exports, and the oil and gas sector is around 25 per cent of gross domestic product. So the 50% fall in world oil prices over the last year, which began about a year ago and has been proceeding steadily, almost on a month by month basis, has led to a severe shortage of US dollars available for Venezuela imports, putting Venezuela in a situation comparable to that faced by, say, Nigeria (but not comparable to other petro-currencies with more diverse inflows and outflows of US dollars, such as the Canada dollar). A year and a half ago (see WCO April 2014), before the fall in oil prices, Venezuela had fine-tuned, in the then-prevailing +US$100/bbl oil price environment, its multiple tier exchange rate system-at that time, the parallel market bolivar/US$ rate was around 70. In February 2015, after months of oil price declines, and when the parallel market rate was around 170/US$, Venezuela combined the Sicad 1 and 2 rates into one Sicad rate (at the old Sicad 1 rate of 12.8/US$), and introduced the SIMADI exchange rate, based on weekly foreign exchange auctions, and which was, at that moment, much the same as the parallel market rate. Since then, with further declines in world oil prices, the SIMADI rate has fallen to around 200 (used for a relatively small proportion of Venezuelan imports), but the free market rate has fallen to around 680 bolivars/US$.
Several prominent (mostly American) commentators have hinted at a suggestion for resolving issues connected with a possible Greece exit from Euro. Instead of Greece (the weakest country) leaving the Euro, perhaps Germany (by far the strongest country) should instead leave the Euro temporarily. The thinking is that, since the locking-rate at which Germany joined the Euro back in 1999 (1.95583 DM/Euro) has turned out to be too low compared to the locking-rates of other European countries, contributing to large German balance of payments surpluses, then one solution would be for Germany to temporarily leave the Euro, and then rejoin at a higher rate. (e.g., former US Fed chairman Bernanke: “If Germany were still using the deutschemark, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially”.) The stronger German economy would be better able to absorb the costs and risks from an exit and re-entry than the weaker Greece economy. Going along with this idea are expressions of regret in some quarters that the United Kingdom did not join the Euro along with other countries back on January 1, 1999. If it had joined then, and if the locking-rate had been the end-of-1998 market rate of around 0.71 pounds/Euro (which is about the same as the current August 2015 rate), the view is that the pound/Euro would have been weaker for the next eight years than the market rate which prevailed until the 2007 financial crisis, which would have stimulated the UK economy and reduced the UK balance of payments deficit, giving the UK the same type of advantages as Germany.
August 19, 2015 update
In moves which quite properly drew world headlines, China has permitted a devaluation of its currency, the yuan, which has now fallen by around 3 1/4% against the US dollar since the beginning of August (down around 4% since this time last year). The devaluation began on August 12, and included a number of technical changes to make day-to-day management of the yuan more flexible (in the daily setting of the reference rate of the yuan, in the permitted daily movement, in the permitted trading band, and so on), suggesting that China is prepared to allow the yuan to change more quickly in future, perhaps indicating that it is open to more weakness in the yuan against the US$. Looking at the big picture, 4% is not a great deal of downward movement by the yuan against the US$, in a year during which most currencies have gone down 10-20% or more over the last year-even currencies with strong trade links to China had gone down by 5-10% against the US$ over the last year before the devaluation of the yuan. Analysts justifying the devaluation point to Chinese economic growth falling below 7%, still at a level which would be considered phenomenal in most economies of the world, but which fits in with China’s accelerated development policies to raise per capita output to higher levels (along with the slower population growth that China has been pushing for over the past few years). There was also the very large downturn in the Chinese stock market last month, although, even after this, the performance of China’s stock market has been strong this year. Looking at geopolitical pressures, there is still a strong lobby in the United States which looks at China’s large trade surplus, and feels that the yuan should be going up, not down. And the China renminbi yuan, as the currency of one of the world’s biggest economies (perhaps the largest), will, at some point in the near future, become one of the currencies in the International Monetary Fund SDR basket.
(World Currency Observer will next be updated on September 2, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)