February 4, 2020 (see February 19 update below). Next update: March 3, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Canada dollar fell by nearly 2% in January 2020 against the US$. The Brazil real fell by 6.5% in US$ terms in January, and the Chile peso fell by 7% (down nearly 20% against the US$ since this time last year). The Colombia peso fell by over 3% in January. European currencies generally weakened against the US$ in January, with the Euro down by nearly 1.5%, and the Norway krone down by nearly 5% in January. Since this time last year, the US$ value of the Swiss franc has risen by 3%, and the United Kingdom pound is up by nearly 1%. The Sweden krona is down by 3% against the Euro since this time last year. The 3% fall of the Hungary forint in January against the US$ reversed the 3% rise of the Hungary forint in December; the December movement had, in turn, reversed the 3% fall of the forint in November against the US$ (month-by-month roller coaster). The Ukraine hryvnia fell by nearly 6.5% in US$ terms in January 2020, but is up nearly 14% since this time last year (the Russia rouble is up more than 4% since this time last year.) The Egypt pound was up by nearly 1.5% against the US$ in January 2020, and the Iran rial fell by 6.5% in January, and is down by 41% since this time last year. The South Africa rand fell by 6.5% in US$ terms in January 2020, while the Mozambique metica rose by a little more than 2%. Controversy continues whether non-CFA franc countries in the West Africa area will join the Eco/CFA franc currency area (right now, it doesn't look likely.) The Sudan pound fell by nearly 5.5% against the US$ in January 2020. The Sierra Leone leone is down by more than 22% against the US$ since this time last year. The Australia dollar fell by nearly 5% against the US$ in January, and is down by nearly 8.5% since this time last year (there were lesser such movements in the same directions by the New Zealand dollar). The China yuan rose by nearly 1% in January against the US$, and is down nearly 3% since this time last year. The Thailand baht fell by nearly 5% against the US$ in January 2020, leaving it at roughly the same level it was at this time last year in US$ terms. The Burma kyat rose by nearly 2.5% in US$ terms in January, and is up by 4% against the US$ since this time last year. The Afghanistan afghani was up by nearly 2% in US$ terms in January 2020. Gold (and to a lesser extent, silver) continues to stand out from other metals, with gold prices up 20% from this time last year. Cocoa prices in US$ terms are up by 24% from this time last year; soybean prices are down by 6% over the month of January. World oil prices in US$ terms fell by nearly 17% in January.

A key issue for WCO exchange rate analysis is to what extent tariff adjustments (such as those made by China and the United States over the last 3 years) have the impact of exchange rate movements, working from the idea that a tariff increase by one country (the import prices of selected foreign goods go up) works in the same direction as a currency depreciation (the import prices of all foreign goods go up). A tariff increase by a country works in one direction, (imports) while a currency depreciation works in both directions (import prices up, export prices down) – to get the both-way effects of a currency depreciation, the tariff must, at a minimum, be matched by an equivalent retaliatory tariff by the other country. Even so, a 1% increase in tariffs imposed by one country on another, followed by a 1% retaliatory tariff imposed by the 2nd country on the first, has nowhere near the impact of a currency depreciation. The currency depreciation will , at a stroke, affect all traded goods (it takes an encyclopedia of tariff increases to even attempt to reach the same comprehensive impact of a currency depreciation, which we have seen in the U.S.-China trade war, involving lots of work for customs brokers); there will usually be some exemption from the tariffs for small amounts of individual imports brought home by individual travelers and tourists (the currency depreciation will not), travelers from the first country will not have to pay the tariffs on goods consumed in the second country (they would, however, be caught by the currency depreciation, which also will apply to services consumed in the second country). Another issue is that the price paid by the end user of a supply chain (foreign producer to exporter to importer to wholesaler to retailer to consumer) will include the profits/wages earned on each point of the chain, and there will be the option at each stage of the supply chain to absorb final price increases by reducing profits/wages – this is more likely to happen with tariffs seen as temporary (such as from a trade war) than from a currency depreciation (which will generally happen to correct a more fundamental imbalance, and which will therefore be more likely to be permanent). Another aspect of exchange rates changes is the impact on capital flows, such as cross-border trade finance lending (bills of exchange, letters of credit) by banks in support of international trade. Also, tariff changes, particularly those involved in retaliatory moves, will be targeted on imports from selected countries (rules of origin issues), while exchange rate changes, expressed as currency-per-US$, will, at least initially, occur against all currencies.

February 19, 2020 update

There are reports that the Denmark central bank (Danmarks Nationalbank) will move policy interest rates up, from negative to at least zero, at some time this year, and that this is due largely to weakness in the Denmark krone in the last year against the Euro, which the Denmark central bank has offset by steadily selling foreign currency (buying kroner) from its very large foreign exchange reserves. (The central bank has indicated that, in the period from January to December 2019, intervention to sell foreign exchange reserves in support of the krone were the equivalent of Kr7.6billion, but that this increased substantially in January 2020, amounting to the equivalent of Kr12.1billion.) As a member of the European Union which has chosen not to adopt the Euro (a decision which is viewed as firm, because it was confirmed by the vote results of a nationwide referendum), the krone is nonetheless pegged to the Euro, as Denmark is currently the only member of the Europe Exchange Rate Mechanism (ERM), and, as such, the krone is frequently the target of currency buying and selling, based on views as to whether, at any point in time, the fixed level of the krone is seen as over- or under-valued. It was during one such period in 2015, when the krone was being pushed up in world currency markets, that Denmark decided to move to negative interest rates, to lower demand for the krone. It was also during such periods of strength that the Denmark central bank accumulated the foreign exchange reserves that are being used to offset the current period of downward pressure on the krone.

China has moved to implement the January 2020 tariff deal with the United States, with tariff reductions on US$75 billion in imports from the U.S. But the coronavirus outbreak in China will likely affect implementation…And, although the Brazil real has been generally weakening over the last three years, there are reports of strong statements by the Brazil economy measure which suggest the Brazil government still views the real as over-valued. The remarks were in connection with an upturn late last week in the US$ value of the real (currently at 4.31, at 3.7 a year ago, and at around 3 reals per 1$US three years ago).

(World Currency Observer will next be updated on March 3, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition). For permission-to-quote enquiries, e-mail World Currency Observer at WCO@briargreen.com.)