June 6, 2017 (see June 21, 2017 update below). Next update: July 5, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Canada dollar and the Mexico peso both rose by around 1.5% in May; the Iceland króna was up over 7% in May against the US$, and is up over 20% since this time last year. The Haiti gourde rose by nearly 8% in May against the US%, bringing it back to the level it was a year ago. The Costa Rica colon fell by 2.1% in May, and is over 7% lower than this time last year against the US$. In South America, the Argentina peso fell by nearly 4% in May against the US$, and is down around 14.5% since this time last year. The Brazil peso fell by around 1.5% in May, but is still 10% stronger against the US$ than this time last year. (The strength of the Brazil peso is setting the stage for a significant drop in Brazil interest rates). The Euro gained over 3% against the US$ in May, while the UK pound, after a bumpy ride, finished steady on the month against the US$; the UK pound is 14% weaker against the US$ since this time last year. All East European currencies strengthened a little against the Euro in May, and were up against the US$, with increases ranging between 3 and 5% . The Moldova leu moved up by nearly 5 1/2% against the US$ in May, and the Uzbekistan some fell by nearly 4%. The Russia rouble was up a little against the US$ in May, and is up against the US$ by more than 14% since this time last year. The Egypt pound was steady in May (the Bank of Egypt sharply increased interest rates earlier in May). The Israel pound rose by 2.6% in May against the US$, and is up by nearly 8% since this time last year. The South Africa rand rose 4% in May against the US$, and is up 18% against the US$ since this time last year. The China yuan finished the last week of May/early June up more than 1% against the US$, with virtually all of the movement in the last week (see chart below). The New Zealand dollar rose by nearly 4% in May against the US$, while the Australian dollar weakened slightly. The South Korea won moved up a little more than 1.5% in May against the US$, and is up nearly 5.5% since this time last year. The Japan yen moved up nearly 1% in May against the US dollar, finishing at around 111.5/US$. This was after a month during which the yen, at one point, touched 114/US$, which was 5% weaker than its mid-April peak of 108.5. The Thailand baht was up by around 1.5% against the US$ in May 2017, and is up by around 4.5% since this time last year. The Pakistan rupee and India rupee were steady (see below for a comparison with the China yuan).

On the eve of the forthcoming BREXIT negotiations with the United Kingdom, the European Commission is continuing with a process of defining the near future (until 2025) of the EU without the UK, as it moves from EU 28 to EU 27 members. The smaller EU 27 includes 19 countries that use the Euro, and one (Denmark) whose currency is fixed against the Euro. Of the remaining 7 countries, one of these is Sweden, and the other 6 are in Eastern Europe: Bulgaria, Croatia, Czech Republic, Hungary, Poland and Romania. The redefining process began with the issue, in March, of an EC Commission policy paper, and is continuing with the issue of a Reflection Paper on the Deepening of the Economic and Monetary Union, which focuses heavily on the Euro, noting that: "After the departure of the United Kingdom from the EU, the economies of Euro area countries will represent 85% of the total GDP of the EU. This highlights the euro’s central role in the future EU at 27. Sixty countries and territories, representing another 175 million people, have pegged their own currencies, either directly or indirectly, to the euro. Given its importance for the world, it is just as important to international partners and investors". Other observations in the Reflections paper include the following: "The single currency is one of Europe’s most significant and tangible achievements. It has helped our economies to integrate and has brought Europeans closer together. A strong euro requires a stronger Economic and Monetary Union [detailed discussion of future EMU measures is the key thrust of the EU paper.] For most Europeans, the euro is part of daily life. For the first “generation euro” it is the only currency they have ever known. Those with longer memories will remember the changes the euro has brought and will have seen first-hand its advantages. Their mortgages and living standards are no longer at the mercy of the high inflation and volatile exchange rates of the 1970s and 1980s. Since the introduction of the euro, inflation has mostly hovered around or below 2%, the reference value of the European Central Bank. Citizens no longer pay expensive charges to change currencies when crossing internal borders in the euro area. They no longer pay more for transferring or withdrawing money in another euro area country. For European businesses, the advantages of the euro are equally clear-cut. It is one of the major attractions and benefits of being part of the world’s largest single market and trade bloc. For them, the single currency has meant big savings in both time and money. Thanks to the euro’s status as the world’s second reserve currency, companies invoice about two thirds of their export and half of their import business in euros. There are no more exchange-rate risks or transaction costs for cross-border operations. Invoices can be issued in one currency for clients in 19 countries. It is easier and on average cheaper to borrow money from banks or other financing sources. And much more worldwide business can be done in euros today than was ever possible with the franc, lira or deutschmark. The general context of low interest rates has allowed households and businesses to benefit from cheaper credit in recent years. Likewise, euro area governments have saved EUR 50 billion in interest payments annually compared to a few years ago. That means extra money that could be used to reduce public debt or boost public investment or education spending."

There will be indications of the tone of the forthcoming NAFTA renegotiations, among Canada, Mexico and the United States, in how the dispute on Mexican sugar exports to the United States evolves in the next few days (there are some similarities with softwood lumber issues between Canada and the United States.) It has been widely remarked that the tone of the formal letter notifying the US Congress that the United States intends to renegotiate NAFTA is much more business-like than the rhetoric from recent news headlines and twitter feeds, in that it stresses the need for technical updates of a 25 year old agreement, to bring it up to date in a changing world. The key excerpt from the US letter to Congress is as follows: “The United States seeks to support higher-paying jobs in the United States and to grow the U.S. economy by improving U.S. opportunities under NAFTA...In particular, we note that NAFTA was negotiated 25 years ago, and while our economy and businesses have changed considerably over that period, NAFTA has not. Many chapters are outdated and do not reflect modern standards. For example, digital trade was in its infancy when NAFTA was enacted. In addition, and consistent with the negotiating objectives in the Trade Priorities and Accountability Act, our aim is that NAFTA be modernized to include new provisions to address intellectual property rights, regulatory practices, state-owned enterprises, services, customs procedures, sanitary and phytosanitary measures, labor, environment, and small and medium enterprises. Moreover, establishing effective implementation and aggressive enforcement of the commitments made by our trading partners under our trade agreements is vital to the success of these agreements and should be improved in the context of NAFTA.”

June 21, 2017 update

The planned rise in US interest rates by the United States Federal Reserve (generally called normalisation, based on a view that interest rates have been too low for some years) has just moved forward again, with a ¼ of 1% increase in June, and one additional increase to come later this year. Because the movement by the Fed is happening in the face of moderating US growth and continued low U.S. inflation, dissent is becoming somewhat more widespread, such as a highly technical letter, sent to the Fed by a group of economists, which suggests that there has been a fall in the inflation-neutral rate of interest, that inflation higher than the current 2% US target would be low risk, and that a tighter labor market (a projected consequence if low interest rates were to continue) is desirable. The world-wide exchange rate impact of the Fed moves will become more clear in the next few days.

The Swiss National Bank (central bank) says flatly that, due mostly to investment inflows into Switzerland, “the Swiss franc is significantly overvalued”. This is despite negative interest rates and negative bond yields - the lowest in the world - and despite months of intervention in foreign exchange markets. The inflation rate for 2017 will be zero per cent, economic growth is below the desirable range in key sectors, and the too-strong franc is, says the bank, hurting exports. The Swiss franc is currently at around 0.97/1$US, much stronger than the 1.01/US$ it was at the beginning of March. Over that time period, the Euro has moved from 0.95/US$ to around 0.90/$US, so the Swiss franc has weakened somewhat against the Euro over that interval.

(World Currency Observer will next be updated on July 5, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).)