September 4, 2019 (see September 18 update below) Next update: October 2, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).

August was a month in which the US$ generally strengthened against currencies around the world (one big exception: the Japan yen), but there was particular attention given to weakness by the China renminbi yuan (see below). The Mexico peso fell by 5.5% against the US$ in August. The Iceland króna fell by over 3% against the US$ in August, leaving it down by more than 16% since this time last year. South American currencies moved down against the US$ in August, though (with the exception of Venezuela, see below) nowhere near as much as the 36% fall by the Argentina peso (another infusion of support from the IMF may be on its way, see below). The Brazil peso fell by more than 10%, the Uruguay peso was down by nearly 7%, and the Colombia peso by 5.5% in August. South America currencies are down against the US$ since this time last year, but the Brazil peso is roughly at the same value as this time last year. The Euro declined by just over 1% against the US$ in August, and is down against the US$ by 5.5% since this time last year. In a month with lots of news about Brexit, there was little net movement of the pound against the US$, and the pound actually strengthened against the Euro in August, representing a very slight weakening on the month against the US$. The Norway krone fell by nearly 4% against the US$ in August, and the Sweden krona fell by 2.5%. The Turkey lira fell by 5% against the US$ in August, and its current level of around 5.85/$1US is below its August 2018 levels, which at one point had touched 7/$1US at this time last year. Most other East Europe currencies fell by around 1% in August, but the Albania lek strengthened slightly. The Uzbekistan som fell by over 8% in August against the US$ (see below), and the Russia rouble fell by 5% (but the rouble is 2% stronger against the US$ than it was at this time last year). A fall of 7.5% by the South Africa rand in August left it down 4% against the US$ since this time last year. The Liberia dollar fell by 2% in August against the US$, and both the Ethiopia birr and the Ghana dalasi were down by around 1.25%. With the exception of the Uganda shilling, Africa currencies are weaker against the US$ since this time last year - the Uganda shilling is up by 2% against the US$ since this time last year. The 4% downward movement by the China yuan in August was one of the biggest around the world (in a month when, as noted in the August World Currency Observer, the United States decided to designate China as a currency manipulator and place retaliatory tariffs on imports from China), but the resulting 5% downward movement by the yuan since this time last year was not out of line with currency movements around the world (e.g, the 5.5% decline by Euro against the US$ since this time last year). At the same time, in August, the Japan yen rose by 2.2% against the US$. The Philippines peso is up by 2.5% against the US$ since this time last year. A decline by the India rupee of nearly 4% against the US$ in August left the rupee at around the same level as this time last year. The Sri Lanka rupee is down against the US$ by 12% since this time last year, after a 2.5% decline in August. Gold prices and silver prices are up by more than 25% since this time last year, after moving up strongly in August, a month in which other metals prices fell sharply (there is a class of investors who view gold as an attractive safe haven in the current economic environment of falling long term yields). Oil prices in US$ were down by around 5% in August, and down by more than 20% since this time last year. Coconut oil and palm oil prices rose by around 5% in US$ terms - coconut oil prices in US$ are down 25% since this time last year.

Among former-USSR countries, the currency with the largest year-over-year movement has been the Uzbekistan som, which has fallen by nearly 20% since this time last year, after an 8% fall in August. On August 9, the Uzbekistan central bank indicated that downward pressure on the som had sharply increased in July and that it had been intervening in the foreign exchange market, but that it was also going to “expand the corridor of daily exchange rate fluctuations”. At that time, it cited a mix of greater domestic demand for foreign currency, along with declines in the U$ value of the currencies of Uzbekistan’s major trading partners (Russia, Kazakhstan and China), which was putting pressure on Uzbekistan to lower the value of its currency. But, as acknowledged in a statement on August 20 by the central bank, the widening of the corridor had quickly become an abolition of the corridor, i.e., the som had allowed to float. In response to the acknowledged greater domestic demand for foreign currency, it has been reported that Uzbekistan has removed restrictions on the purchase by Uzbeks of foreign currency (since August 20, commercial banks started selling foreign currency in cash through currency exchange offices). It should also be remarked that the Uzbekistan som has been under recent downward pressure due to developments in the cotton market, which is Uzbekistan’s principal exports – cotton prices have fallen sharply over the last year, and Uzbekistan has had difficulties in finding the labor to harvest the crop (which has led to international criticism of moves by Uzbekistan to press its citizens into work on cotton harvests). The abolition of the daily corridor may be among the final steps in the transition of Uzbekistan from a dual currency regime, a transition which began in 2017, along with many other measures to liberalise its economy, with the support and encouragement of the World Bank.

Argentina and Venezuela continue to be the two South American countries with standout rates of depreciation of their currencies against the US$. Venezuela is a classic case of hyperinflation, despite a strong (heavy) oil resource base, and its situation has been made worse by international sanctions, led by the United States. (Note: the country whose support for Venezuela has been among the strongest has been Cuba, which has had in place an oil-for-services (medical for example) arrangement with Venezuela for several years – the paradox is that Cuba has had little evident influence on the Venezuela exchange rate, one indication of this being that Cuba has had no inflation for around 25 years). Argentina’s problems are widely considered to be rooted in the policies of the previous government, and the current government (Macri), in power since 2016, has been proceeding with the support and approval for each step from the “establishment” world community, including the International Monetary Fund. The fundamentals of the Argentina agricultural export industry remain strong. But, last week, Argentina essentially “gave up”, asking for restructure of its debt payments (and, at the same time, it likely entered into a technical default situation on some of its US$-denominated short-term debt). At the same time, Argentina imposed highly-selective capital controls to support the peso, such as a time-limit for conversion of foreign currency receipts by exporters into Argentina pesos. Because countries surrounding the two have flexible exchange rates in place (Colombia-Brazil-Guyana for Venezuela, and Chile-Bolivia-Paraguay-Brazil-Uruguay for Argentina), the spillover of the foreign exchange aspects of the crisis has been minimal, but there has been a migration crisis for Colombia, due to Venezuela citizens fleeing the country. One interesting comparison with Venezuela is Iran, whose economic structure is oil-based like Venezuela, and which is also the target of U.S. sanctions, although for different reasons.

September 18, 2019 update

WCO has some observations on the European Central Bank announcement of a restart of Quantitative Easing in the Euro area, and of interest rate cuts, which will make ECB policy interest rates even more negative than before, motivated by slow economic growth, and influenced by a 1% per cent inflation rate, well below the 2% target. Among the reasons why the ECB made the moves (in the face of more dissent than usual in such cases), it was noted that “Almost all the things that you see in Europe, the creation of more than 11 million jobs over a short period of time, the recovery, the sustained growth for several quarters were by and large produced by our monetary policy. There was very little else, of course there were structural reforms in some countries, in some countries. So now it’s high time I think for the fiscal policy to take charge.” A technical note is that among the announced measures, the ECB said that excess reserves held by banks at the ECB will not be subject to the negative interest rates – without that, the ECB would have lost a great deal of influence over the European banking system. And, with regard to the impact on the Euro exchange rate value (we will see what happens over the next couple of weeks), the ECB indicated that the ECB does not target exchange rates, but that he (Draghi) had already seen the U.S. President’s comment: “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”

Two items in the media. An issue of Bloomberg Business Week (Sept 2/19) with articles on each of the 103 elements of the periodic table of the elements, ranging from precious metals like gold, rare earth elements, and gases such as helium and hydrogen. The feature which WCO found of the most interest was that the article on each element included the current US$ price. The “star of the show” for the periodic table is, of course, carbon, and there are market prices for each of the wide range of carbon-based products, including coal, oil and the natural gases, and carbon dioxide. Given this wide variety of products, the Business Week choice for a carbon quote is from the United Nations Global Council, the minimum recommended price of US$0.11 per kg. And, then there is the “article” (it is much more than that, based on the analysis of data covering 171 countries) in the U.K. Financial Times (Aug 29/19) on remittances (money sent back to home countries by migrants) around the world, which are enormously influential in supporting exchange rates, particularly in developing countries, but the data suggests the flows are not small for developed countries as well, such as the payments from expatriates to the United Kingdom and the United States.

Whatever the legal aspects, and the role it has played in organising the international financial system since the 1930s, the IMF concept of multiple currency practices remains a useful analytical tool to analyse different types of exchange rate management, such as foreign currency auctions (where, depending on how they are organised, successful bids can have multiple prices), parallel markets (e.g., has a second foreign exchange market emerged because of a large volume of drug-related illegal transactions, or because of business transactions for which not enough funds are available in the legal foreign exchange market), and dual markets (separate legal markets for foreign exchange in a country, each with a different price). The MCP concept, as applied, is very much confined to currency markets – for example, requiring import licences is not a multiple currency practice, but rationing the amount of currency available for selected imports is considered a multiple currency practice, even if the impact may be the same under both regimes. The 2% permissible spread rule for assessing whether multiple currency practices exist in a country may be abandoned by the IMF in the future, but WCO still finds it to be very useful, even if the literature which WCO reads suggests there is sometimes a little imprecision on how it is to be applied (which doesn’t bother us). Sometimes, it refers to a ceiling of 2% between the bid and ask spread (in wholesale markets for large blocks of foreign exchange, of course, because there is a much bigger spread on all but the larger currencies in most foreign exchange markets for small transactions, such as currency for tourists and business travellers). Most often, and most useful, the 2% ceiling refers to the ceiling for deviations between exchange rates in segments of foreign exchange markets, recognising the reality that, for example, the foreign exchange market to fund major capital investments is not the same as the foreign exchange market for tourists. It can also used as a ceiling for the maximum desired deviations between winning bids in foreign exchange auctions, in cases where the winning bids pay the price at which they actually bid, rather than the price which clears the market. The IMF MCP list at the end of 2017 contained a small number of small countries, but that has certainly changed since then, when one realises that the current exchange rate practices of a major country like Nigeria would likely come under the multiple currency practices definition.

(World Currency Observer will next be updated on October 2, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).)