January 1, 2020 (see January 22 update below). Next update: February 4, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

Many currencies around the world strengthened against the US$ in December. The Iceland króna fell (weakened) by more than 4% against the US$ over 2019, while the Canada dollar rose (strengthened) by nearly 5%, and the Mexico peso rose by around 4% over the year (almost all of the net rise of the Mexico peso occurred in December). The Jamaica dollar moved up by more than 4% against the US$ in December, leaving it down just over 2% for the entire 2019 year. The Costa Rica colón was up by more than 6% against the US$ in 2019, with a 1.5% fall in December. A big December upward movement by the Brazil real (5%) left it with a net downward movement of 3.5% in 2019 against the US$. The Chile peso rose by more than 8% in December 2019 against the US$, leaving it down (weaker) by 7% on the year. The Uruguay peso was down by nearly 15% in 2019 against the US$. After a 2% rise in December, the Euro was down by a net 2% over the course of 2019 against the US$. The United Kingdom pound and the Swiss franc both moved up against the US$ in 2019. The Sweden krona was down by a net 5% over 2019 against the US$, after moving up by 2.6% over the month of December (see below). The 3% rise of the Hungary forint in December reversed the 3% fall in November against the US$. The Turkey lira showed a net fall of 12.4% in 2019 against the US$. There was strong upward movement in the last month of 2019 by currencies of former USSR countries. The Ukraine hryvnia was up by nearly 20% in 2019 against the US$, and the Russia rouble was up by nearly 11%. The Uzbekistan som was down by 14% against the US$ over 2019. The Iran rial fell by 5% against the US$ in December, and was down by 34% since the beginning of 2019. The Angola kwanza (a petro-currency) was down by more than 50% against the US$ in 2019. The South Africa rand was up by nearly 4.5% in December against the US$. The Ghana cedi was down by 14% against the US$ in 2019, and the Sierra Leone leone was down by nearly 25% in 2019 (West Africa Euro-linked currencies were down by around 2.5% over 2019). The official rate of the birr against the US$ fell by nearly 5% in December (see below). The net movement of the China yuan over the entire year of 2019 was a fall (weakening) of just over 1% against the US$. The Taiwan dollar was up by 2.3% against the US$ in 2019. The Thailand baht moved up strongly over the last year against the US$, with a net upward movement of nearly 8% (the strength of the baht is, some fear, harming the competitiveness of Thai exports). Oil prices in US$ terms (Brent, West Texas Intermediate) were up by 11-12% in December, and were up by 30-35% over 2019. Gold prices were up by nearly 20% in 2019. World soybean prices were up by 6% in December, representing their entire upward movement in 2019. Cocoa prices fell by 9% in December. (Technical note from WCO: in our monthly summary of exchange rate movements, when WCO talks about currencies against the US$, we are referring to, say, the number of Euros per 1US$ (e.g., Euros/1US$ =0.9), so a strengthening of the Euro means fewer Euros to buy 1US$. In the foreign exchange trading community, Euro against the US$ refers to US$ per 1 Euro (e.g, EURO/USD or EURO: USD). More on the terminology used in the world of foreign exchange in future issues of the brochure edition of WCO).

The transition of the West Africa CFA franc to a currency with a new name, the ECO, is announced to be taking place in 2020, with the peg to remain at about 656 ECO/1Euro, and with a continuation of the convertibility guarantee (ECO to Euro or to gold) from the government of France (which is supporting the move to the ECO). Also, the 50% of the pool of total West Africa Economic and Monetary Union foreign exchange reserves, currently held with the French treasury, will be repatriated (the in-France reserve holdings have been a major political concern for Africa opponents of the CFA franc arrangement, who have been very vocal over the last few months about money being sucked out of Africa), and official representation by the government of France on the WAEMU board will be terminated. The ECO-currency countries are Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Togo and Senegal. West Africa countries which do not use the CFA franc and which will not be joining the monetary union (one issue will be satisfaction of economic convergence criteria, similar to those prior to the lauch of the Euro, are not seen as generally at play here), are the Nigeria (nairu), Ghana (cedi), Sierra Leone (leone), Liberia (Liberia dollar), The Gambia (dalasi) and Cape Verde (escudo). The overall thrust is to eventually unite both groups of countries in one currency (the ECO) in one economic union, the Economic Community of West Africa States (ECOWAS).

There is talk that Ethiopia is undertaking a gradual revaluation – a small movement each day - of the official value of the birr (which was most recently at 31.7901/1$US), and that the intention is to bring the official rate into equality with the parallel rate (midpoint is around 42/1$US) by the end of March. The data that WCO has seen would fit this view. The track of revaluing the official birr value would tie in with the approval, in December, of $3 billion in IMF lending, in support of an Ethiopian economic reform program.

In Saudi Arabia, the sale of 10% of the stock of Aramco (8.5% privately to other Saudi institutions, the other 1.5% publicly, listed in riyals on the Saudi stock exchange, the biggest initial public offering in history), was predicted to have little impact on the Saudi riyal, which has been fixed at 3.75/1$US for many years in a currency board arrangement – if anything, the increased financial resources from the sale would increase the “stability” of the riyal. Aramco holds the Saudi Arabia petroleum reserves and is owned by the Saudi Arabia state, and, by applying the value of the publicly-issued stock to the whole of the company, the market value of Saudi petroleum reserves can be estimated to be in the neighborhood of around US$2 trillion.

The Sweden central bank (the Riksbank) raised its repo rate from minus 0.25% to 0% (interest rate for very short-term secured lending to banks), a move that has been widely interpreted as having more to do with getting away from the abnormal situation of negative interest rates than with anything else, as it comes at a point in time when central banks are generally cutting interest rates. Some excerpts from the Riksbank press release: “Similar to economies abroad, the Swedish economy has entered a phase with lower growth. However, the slowdown is occurring after several years of high growth and strong developments on the labour market, and overall it means that the Swedish economy is going from a stronger-than-normal cycle to a more normal situation. Inflation has been close to 2 per cent since the beginning of 2017. After an expected decline over the summer, it has once again risen to just under 2 per cent…Swedish households are heavily indebted and thereby sensitive to changes in economic conditions. In order to reduce the risks linked to household indebtedness and address the structural problems on the Swedish housing market, measures within housing and tax policy and appropriate macroprudential policy are required.”.

January 22, 2020 update

The text of the January 15/2020 trade agreement (phase 1, with phase 2 to come) between China and the United States has a chapter on exchange rate arrangements (excerpt: “ [China and the U.S.] shall refrain from competitive devaluations and the targeting of exchange rates for competitive purposes..will consult with each other regarding the IMF’s assessment of the exchange rate of each Party”), and another chapter on financial services (excerpt: “No later than April 1, 2020, China shall eliminate foreign equity limits and allow wholly U.S.-owned services suppliers to participate in the securities, fund management, and futures sectors”). Much of the text of the agreement deals with intellectual property and trade in food and agricultural products, and there is an interesting chapter entitled Expanding Trade. This chapter requires that, by the end of 2021, “China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion”, with a breakdown of each of these major groups, which also goes into some detail on individual goods and services. The agreement does not mention tariffs, but the implementation of this chapter could imply tariff reductions on the part of China to achieve the U.S. export targets. Part of the process leading up to this agreement involved the cancellation of United States tariffs which were scheduled to go into effect on December 15, and reductions in other tariffs, so the existence of this chapter suggests it will set a framework for reductions in China tariffs which could contribute towards meeting the U.S. export-to-China targets, and that this chapter is a substitute for requirements for explicit China tariff reductions.

The United Kingdom BREXIT withdrawal from the European Union (the single market, the customs union) will take place at the beginning of 2021, with limited withdrawal of the UK from EU political institutions likely to take place at the end of this month (January 2020). So BREXIT-related moves affecting exchange rates for the rest of the year will primarily be those related to progress on an EU-UK free trade agreement, on the understanding that a no-deal situation will mean, among other things, reciprocal tariffs beginning in 2021.

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