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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

December 6, 2017 (see December 20 update below). Next update: January 3, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).

There was a turnaround in the direction of currency movements around the world in November (until close-of-business on Friday, December 1), with major currencies stronger against the US$, led by a 2.5% appreciation of the Euro against the US$ in November - the Euro is up by nearly 11% against the US$ since this time last year. The Mexico peso was up by nearly 3% against the US$ in November, and is now up nearly 10% since this time last year. The Canada dollar is up by 6% against the US$ since this time last year, and the Iceland króna is up by nearly 8%. In contrast to a general strengthening of European currencies in November, the Norway krone fell by around 1.2% on the month, but is still 3.5% stronger against the US$ than this time last year, although more than 8% weaker against the Euro (there has been some puzzlement regarding why the Norway currency has shown weakness over the last couple of months). The Turkey lira fell by nearly 5% against the US$ in November, and was down against the Euro by a little more than 7.5% (down against the Euro by 30% since this time last year). Among former USSR republics, the most noticeable movement was a nearly 9% decline of the Georgia lari against the US$. There was a huge 15% increase in the value of the Syria pound, which brings it close to the 400/US$ level. The Qatar riyal rose by nearly 2% against the US$ (see the November 29 WCO update for more on Qatar). Against the run of general strength in November by Africa currencies against the US dollar, the Madagascar franc fell by nearly 3%. The Japan yen was up by more than 1.5% against the US$ in November, and the South Korea won was up by 3.8%. The China yuan moved up by a little in November, and is now nearly 4.5% stronger against the US$ than this time last year. The Vanuatu vatu fell by 2.4% on the month against the US$. The Malaysia ringgit continues to show strength, including a 3.8% increase in November, and an 8.2% increase since this time last year. Also showing strength is the currency of Malaysia's neighbour, the Singapore dollar, which was up by over 1.5% against the US$ in November, and by nearly 6% since this time last year. With a nearly 7% rise in oil prices over the last month, oil prices are now up over 30% since this time last year. Exceeding the 30+% year-over-year rise in oil prices are indices of world shipping rates. Agriculture commodity prices are generally down from this time last year, while metals prices are generally up.

Malaysia ringgit and Singapore dollar Dec 2017

One of the more difficult issues related to BREXIT is what will happen on the island of Ireland, where Northern Ireland will leave the European Union, while the country of Ireland will remain. Adding to the complexity is that the 1998 peace settlement of the long-running Irish Republican Army-related war led to a set of agreements, and the establishment of institutions, to increase cooperation between the areas, so a question is what would a hard BREXIT (straight withdrawal by the UK from the EU with no agreements) mean for Ireland peace accord institutions. One of these institutions is InterTrade Ireland, which issued a study examining the impact of a hard BREXIT on tariffs (taxes on imports and exports) and non-tariff trade restrictions. In a hard BREXIT worst-case scenario, the tariffs to be applied would be the multilateral tariffs set by the World Trade Organisations, which is the useful benchmark case examined by this study. The study focuses on Ireland-Northern Ireland trade, characterised by a range of supply chains and products which differ from the overall Ireland-United Kingdom mix. The wild card in assessing the impact of BREXIT tariff changes is the evolution of the Euro/UK pound exchange rate, which is determined in markets far broader than the relatively small amount of Ireland/Northern Ireland trade. Looking at the structure of WTO tariffs, the suggestion is that the largest Northern Ireland impact of a hard BREXIT will be on trade in food products and textiles.

Conflicting cross-country measurements of trade and capital flows occur for most countries of the world. One example: the degree of underreporting of the volume and value of imports and exports by the southeast Asia country of Laos (population: around 7 million), the focus of an IMF working paper, which suggests that underreporting for Laos is more common for imports, so that the size of the Laos trade deficit is underreported. Laos’ principal trading partners include China, Thailand and Vietnam, and one part of the evaluation of underreporting is to examine their records of trade with Laos, comparing them with Laos measurement of trade with them. Export under-reporting for Laos is found to be concentrated in the wood product sector (one of Laos’ principal exports), while the range of imports underreporting is said to occur over a much broader range of sectors.

Another IMF working paper looks at the most fundamental question of exchange rate policy: whether a decline in the exchange rate (depreciation) still leads to an increase in exports, in the modern more globalised world, where trade links among countries tend to be stronger than ever, including, to an increasing extent, imports being used as inputs to exports. The focus is on Latin America, and the exchange rate variable is the real exchange rate, intended to eliminate inflation-related movements of exchange rates – what is left is said to be mostly terms-of-trade effects from drops in world commodity prices. Three channels of exchange rate impact are examined on a sector-by-sector basis: exports, imports of goods used in the production of goods (including exports) and imports of consumer goods and services. The results reported: a non-zero impact for exports and imports (although lower for imports), and results which are less clearly non-zero for real exchange rate impact on imported inputs to production.

December 20, 2017 update

In the country of Sudan (population: 40 million), there has an abrupt, and continuing, weakening of the market rate of the Sudan pound, since US sanctions were lifted on October 12 (the market rate for the Sudan pound quoted by local banks is currently at around 19.85/1$US, while parallel and offshore rates of around 26 are also reported--the Bank of Sudan rate for the pound has just been re-set to 7/1$US, a slight move from the 6 2/3 at which it had been for some time). The sanctions which were lifted, which had been in place since 1996 (separate from the continuing designation of Sudan as a terrorist sponsor), included restrictions on trade, a freeze on Sudan state assets in the United States, and, most importantly for the exchange rate, a ban on financial institutions dealing with Sudan, and the lifting of these has combined to result in an inflow of cash (such as remittances). Also contributing to the currency movement was the removal of some restrictions on in-country foreign exchange transactions by Sudanese banks. The end result has been a reaction of currency markets, after some delay, to the realities of economic life in Sudan, which have included the loss of perhaps 3/4 of oil production when South Sudan seceded from Sudan in 2011 (Sudan is Moslem, and South Sudan has multiple religions), and the three-year old fall in world oil prices, to both of which the Sudan government had responded with inflation-generating monetary policy. (One Sudan export offsetting the loss of oil has been gold production). Continuing to evolve is the relationship with South Sudan, which has a base population of perhaps 12.5 million, (reduced by millions of South Sudan refugees in other countries, due to the internal civil war in South Sudan, which started quite soon after secession, and which has disrupted oil production). Sudan has a border on the Red Sea, through which land-locked South Sudan ships its oil, through the Greater Nile oil pipeline, to Port Sudan for export to world markets, in return for conveyance charges to Sudan, over which there are disagreements centering on South Sudan arrears in payments, but there are increasingly moves by both countries towards greater economic cooperation. Among other tensions are agreements with Egypt and Ethiopia on the flow of Nile water. South Sudan has a parallel exchange rate at around 180 pounds/1$US (official rate: 125) and, given the immense oil reserves in South Sudan, has the potential to become a petro-currency.

Continuing the theme of petro-currencies, there have been announcements which may lead to the issuance of currencies linked to physical quantities of oil (these may be similar, in some ways, to the tobacco-backed currencies of the 18th century). OilCoin is being marketed as a digital currency, with each unit to be “backed” by a barrel of oil (“Each OilCoin issued into circulation will be supported by oil assets corresponding to rights to a single reserve barrel of oil on a one-to-one basis”), with the underlying technology to be the same as those for the Ethereum digital currency (Ethereum is a competitor with Bitcoin). And, Venezuela has announced the concept of a Petro, an international currency to be backed by oil reserves--while the details of the Venezuela proposal appear to be more vague, it is significant that a sovereign government would be involved. WCO is studying the proposals, and will be interested to see how these ideas unfold.

(World Currency Observer will next be updated on January 3, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)