Headline for .     Since the beginning of 2018, despite the Covid-19 pandemic, currencies around the world are generally down against the United States dollar.     
World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

December 1, 2021 (see December 15 and December 22 updates below). Next update: January 4, 2022. Visit Search to look at past issues of World Currency Observer (brochure edition).

Looking at various measurements of weighted averages of currencies, they suggest that currencies of the larger economies of the world are generally up against the United States dollar from their values prior to the pandemic, while emerging market currencies are generally weaker against the United States dollar since then. Two examples of this are the movements of the Canada dollar and Mexico peso since their values before the pandemic (but it should be noted that, unlike this case, not all countries fall cleanly into each group). Also to be noted at this point in time: the pandemic continues despite the world economic recovery since the depths of a year-and-a-half ago, and there is no clear agreement whether the higher inflation of the last 2-3 months will turn out to be transitory, or is permanent enough to force a significant rise in worldwide interest rates.

In November 2021, the Mexico peso fell by 4% against the US$ (down by nearly 16% since before the pandemic), and the Canada dollar was down by 3%. The Costa Rica colón rose slightly against the US$ in November. The Paraguay guarani rose by 1.2% against the US$ in November, and is down 5% from its value before the pandemic. The Colombia peso fell by 5.5% in November, and the Chile peso was down by 3.3%. The Euro fell by 2% against the US$ in November. The Sweden krona fell by 5% against the US$ in November. The Norway krone is now down by 2.5% against its US$ value before the pandemic. Aside from the sharp fall in the Turkey lira in November 2021 (see below), other East Europe and Balkan currencies fell in the 2-4% range against the US$ in November 2021. The Russia rouble was down by 6% against the US$ in November; the Georgia tenge rose slightly in November. The South Africa rand fell by nearly 5% in November against the US$, and is now down by nearly 16% since before the pandemic. The Angola kwanza rose by 2% in November against the US$. The Japan yen rose by 3% against the US$ in November, and the Australian dollar fell by nearly 5.5%. The South Korea won rose by 4% against the US$ in November, and is up by 2.5% since its value before the pandemic. After strengthening until the middle of the month against the US$, the Thailand baht fell back, finishing the month down by 1.5% against the US$, and down by nearly 14% from its value before the pandemic. Oil prices fell sharply in November, down around 15% in US$ terms. World wheat prices rose by 4.5% in November, and are up by nearly 45% from their level before the pandemic. As widely noted, the prices of a broad range of commodities are up substantially from their pre-pandemic levels (movements on the order of 20%, 50%, more than 100% for tin and for natural gas prices,). Exceptions include cocoa and rice. Cotton prices are up by 70% from their value before the pandemic.

WCO, noting that the central banks of several countries (most recently, Nigeria, in addition to several Caribbean countries, with more countries to come, such as Tanzania) have launched digital currencies, is thinking about whether the digital currencies will trade 1:1 (at parity) with physical currency and/or bank currency- if not, they may give rise to parallel exchange rates. Digital currencies are issued by central banks, while bitcoins/cryptocurrencies are issued by private firms. Digital currencies receive zero interest from their central bank issuers, so, in this dimension, they do not compete with bank deposits. But the limitations on the amount outstanding of digital currencies, in contrast to the more elastic (dependent on the amount of loans) supplies of bank deposits, combined with issues relating to settlement of buy/sell transactions, may lead to, for example, the naira price of a commodity within Nigeria being more/less than the bank deposit price. On the other hand, this may be of little overall importance in economies that rely almost exclusively on cash, such as Nigeria. Countries that, so far, have found the idea of central bank digital currencies to be of interest include those that rely, to a significant extent, on remittances of currency from citizens working in other countries.

The Turkey lira fell sharply in November 2021, down by around 40% against the US$, to around 13.3/1$US. Late in the month, the Central Bank of the Republic of Turkey issued a statement, indicating that Turkey “implements a floating exchange rate regime and has no commitment to any exchange rate level. Exchange rates are determined by supply and demand conditions according to free market dynamics. Under certain conditions, the Central Bank may only intervene in excessive volatility without aiming any permanent direction. In FX markets, unhealthy price formations are being observed that are unrealistic and completely detached from economic fundamentals. The CBRT deemed it necessary to warn our companies and citizens against possible losses by trading at values completely detached from economic fundamentals under extremely volatile market conditions.” The widespread view is that Turkey interest rate policy has contributed to weakness in the lira, with a cumulative 400 basis point fall in the central bank-administered 1 week repo rate since mid-September 2021, which, besides exchange rate weakness, has been reflected in a 400 basis point rise in market-determined 10 year Turkey bond yields (to around 21%, versus year-over-year inflation of just under 20%) over the same period. Like many other countries, the latest 1 month inflation rate in Turkey has been large compared to previous months.

 Turkey lira inflation repo rate Dec 2021.png

December 15, 2021 update

China is widely viewed as setting the stage for the formal launch of its currency, the yuan, in digital form, often known as e-CNY. (A pilot digital currency program was started in 2019, but a hurdle has been the popularity of mobile payment aps). Among the steps was the September 24, 2021 announcement of a crackdown by the government of China on private virtual currency transactions (i.e. all crypto currencies, including bitcoin). As summarized by the Bank of China, on behalf of perhaps all major legal and regulatory bodies in China (both federal and state), the prohibition was very comprehensive, covering not only all virtual transactions originating in China, but also those provided to China residents by foreign entities. “ Recently, virtual currency trading hype activities have risen, disrupting the economic and financial order, breeding illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, and money laundering, and seriously endangering the safety of people's property… Virtual currency does not have the same legal status as legal currency. Virtual currencies such as Bitcoin, Ether, and TEDA have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, and exist in digital form. They are not legal and should not and cannot be used as currency in the market… Financial institutions and non-bank payment institutions shall not provide services such as account opening, fund transfer, clearing and settlement for virtual currency-related business activities, shall not include virtual currency in the scope of collateral, shall not carry out virtual currency-related insurance business or use virtual currency… Internet companies are not allowed to provide services such as online business premises, commercial display, marketing promotion, and paid diversion for virtual currency-related business activities ” The approach by China is viewed as having stimulated work on the development of digital currencies by other central banks of the world, such as the United States central bank (the Federal Reserve Bank). WCO would add that the data our staff has seen indicates that the bitcoin price impact after the September 24 China announcement was not large, which could suggest any one of several things, such as that the prohibition had already been incorporated in the prices of the many virtual currencies, or that China had already effectively excluded private virtual currencies from the country before the informal announcement. There are also suggestions that the eventual domicile of private virtual currency issuers may be the offshore financial centers of the world, and that new such centers may emerge which are based on bitcoins.

The relative strength of the economies of different countries has important implications (such as China and the United States). To compare the value of goods and services produced by different countries, one must start with the national accounts (GDP, GNP, etc.), which multiply the total amounts of in-country goods and services produced, by the in-country prices of those goods and services. Right away, there are problems, such as with education and many health services, whose in-country values depend upon the importance attached to them by each country, measured by compensation to the providers of these services (reflecting factors such as the perceived quality of these services). Even for goods which are based on well-traded commodities with clearly defined world prices, local valuations can differ widely – compare, for example, the price of a cup of coffee in the coffee-loving United States with the price in Russia. There is also the issue of market structures among countries, such as the degree of price competition, wage structures, health and safety regulations, and even climate. (A “service” bundle which is very difficult to put a market value on, but which is of very high importance: low infant-mortality outcomes.) After dealing with such issues, among the final issues in the comparison of total goods and services production is converting the currencies of, say, the two countries to be compared, to a common currency, such as the United States dollar. The clear choice (if you have gotten to this stage, bypassing all these other issues) is to use something like the market value of the two currencies, perhaps adjusted for things such as the existence of parallel markets, or government currency windows for different types of exports, imports, investments, etc. Commentators that do the conversion using purchasing power parity exchange rate measures instead of market rates are not always implying that the PPP rate is “true” and the market rate is “false” (although that can be true for those countries whose official exchange rates, even those quoted by the local central bank, are a fiction). Rather, in those cases where a low income country produces, say, a high-quality education service on which it places a low price: in these cases, for comparison among countries, it should be valued at the same price as it is in a higher income country (but this is not something which is best done by using PPP exchange rates, although the use of PPP might give a closer approximation in many cases). Other issues include the use of time trends of PPP to adjust for the volatility of market exchange rates and, the very famous propositions on the spillover of wages paid in traded goods sectors to those in the non-traded services sectors.

December 22, 2021 update

The G20 Debt Service Suspension Initiative, which offered lightened lending terms over the period of April 2020 to December 2021 to 73 countries, is to expire at the beginning of 2022. The DSSI was taken up by 48 countries, of which 31 are from the African continent; of the remaining 25 countries which did not take it up, 6 are in Africa, including Nigeria and Côte d'Ivoire (which is a CFA franc country). In other regions of the world: Pakistan and Nepal took it up, while Bangladesh did not. A World Bank summary, as interpreted by WCO, suggests aggregate cash flow savings for 2021, for participants, amount to roughly US$16.5 billion, which will presumably disappear in 2022 (the same data suggest to WCO that, for some countries, the savings amount to as much as 4% of GDP). Aside from this particular program, there is are several indications of a hardening in the stance of creditors who made concessions toward emerging counties, although it should be noted that many lenders made no concessions at all. Among the major lenders that did make concessions, an important one was China, although, as for other country lending, concessions on official loans were generally more generous than those from non-official entities. Among DSSI debtor countries which have to deal with this is Kenya (for whom the amount of relief from DSSI amounts to around 1% of GDP this year). Going forward with regard to DSSI clients (on the understanding that debt payments are suspended, not cancelled), official bodies are advancing an overall approach to terms and conditions of loans known as the Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative, although there are indications that far fewer countries are taking this up than participated in the DSSI.

(World Currency Observer will next be updated on January 4, 2022. 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.)