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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

July 1, 2020 (see July 15 and July 21 updates below). Next update: August 4, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

As the coronavirus covid-19 pandemic continues, currencies have generally been allowed to find their market-determined levels in most countries, against a background of lower interest rates and more liquidity (targeted at avoiding economic meltdown), and of central banks and other exchange rate authorities concentrating on ensuring that there is enough foreign exchange for essential imports (food and energy), and that adequate financing is available to keep international supply chains flowing. Intervention in foreign exchange markets, when it has occurred, has been generally on the buy side, injecting foreign currency in the market to ensure liquidity for the home exchange rate, often with explicit mention that the purpose is to facilitate downward movement of currencies.

So it is interesting that there is a long list of currencies around the world which have appreciated steadily against the US$ since reaching a low in the middle of March, among which are the Norway kroner, the Thailand baht , the Sweden kroner, the Canada dollar, etc. There is another list of currencies whose appreciation against the US$ has been less steady, but the net movement has still been up - this list includes the Euro, the Taiwan dollar, etc. Despite the sharp reductions in economic activity throughout the world due to government-led responses (partial shutdowns) to the coronavirus pandemic, the reductions in trade and capital movements in all countries (inflows and outflows both down) have added up to orderly movements in exchange rates. Even initiatives by emerging countries to borrow more (or, in some cases, to moderate the interest and principal burden of their existing external debt) are not motivated by classic balance of payments crisis situations, but rather by the need to support their domestic economies. And, of course, the higher income countries of the world have less need for external US$ or Euro-denominated finance, and have been able to finance their deficits by issuing debt denominated in their own currencies (see below). A common thread which appears to be emerging is that countries which have, so far, best succeeded in moderating or eliminating growth in Covid-19 cases -"flattening the curve", which, of course, is not the same as eliminating the impact of the coronavirus, which will take years - have seen this success reflected in stronger exchange rates against the United States dollar and against other currencies around the world (example: the New Zealand dollar). This is something of a paradox, since, as noted above, exchange rate authorities in most countries have expressed approval for the depreciation of their exchange rates.

The Mexico peso fell by 4% against the US$ in June, and the Canada dollar was up by 1.5%. The Iceland króna fell by 1% in June against the US$, and is down by 11% since this time last year. The Dominican Republic peso fell by nearly 2% in June 2020, and is down more than 15% since this time last year. The Jamaica dollar rose by 3.5% in June against the US$, but is down by 6.5% since this time last year. (Statistics shown to WCO suggest that Jamaica's rate of coronavirus infection is lower than that of New Zealand, and is almost as low as that of Cuba, which has a fixed exchange rate.) With the exception of the Uruguay peso, which rose by 3% against the US$ in June 2020 (down 19% since this time last year), South America currencies were generally weaker against the US$ in June, with the Brazil peso down slightly (down 42% since this time last year). The Euro continued its May 2020 rise with a 1% appreciation in June against the US$. The Swiss franc rose by 1.5% in June, and is up by 3% against the US$ since this time last year (Switzerland was perhaps the only currency in the world which has seen steady central bank intervention over the shutdown period in order to moderate upward strength). The United Kingdom pound is down by 3% against the US$ since this time last year. Almost all Eastern Europe currencies rose against the US$ in June 2020, with the exceptions being the Hungary forint and Turkey lira, both down slightly. Currencies of nearly all former USSR countries rose against the US$ in June, with the strongest movement by the Georgia lari, up by 4.5%. The Russia rouble rose by 1.5% against the US$ in June 2020. The Iran riyal fell by 28% against the US$ in June, and the Syrian pound was down by nearly 80%. The Israel shekel was up by 2.5% against the US$ in June, and up by over 4% since this time last year. The Egypt pound was down by 2% against the US$ in June, but up by 3.5% since this time last year. The Tunisia dinar rose by nearly 1.5% in June against the US$. The Guinea franc fell by just over 2% in June, while the CFA franc, used by a number of countries in western and central Africa, rose by 1% (linked to the Euro). The official Nigeria naira fell slightly in June (Nigeria is managing its multiple exchange rate structure as part its approach to coping with the coronavirus). The Mauritania ouguiya fell by over 6% in June against the US$). The DR Congo (Congo-Kinasha) franc fell by nearly 3% against the US$ in June 2020 (down 13% since this time last year), and the South Africa rand was up by 1.5% in June. The Mozambique metical fell by 2.5% in June against the US$. The Uganda shilling was up by nearly 1.5% in June, and is at roughly the same level against the US$ as at this time last year. The New Zealand dollar rose by 4% against the US$ in June (down 4.5% since this time last year), and the Australia dollar was up by 3.5% (down just under 2% since this time last year). The Indonesia rupiah rose by 3.5% against the US$ in June. The China yuan was up by nearly 1% against the US$ in June (down 3% since this time last year against the US$). The Pakistan rupee fell by just over 3% against the US$ in June, and is down by 2% against the US$ since this time last year. The Thailand baht rose by 2.5% against the US$ in June, and the Malaysia ringgit was up by 2% (down nearly 3% since this time last year against the US$). The US$ prices of a broad range of commodities moved up in June 2020, such as copper. Among the exceptions to the upward movement were cocoa and coffee prices. Oil prices are around 40% lower than they were at the start of 2020.

Jamaica dollar and Mexico peso July 2020

A recurring theme in commentary about the coronavirus pandemic is the debt situation of the emerging market group of countries. Public entities such as the IMF and Paris Club have been active, with new announcements of financing by the IMF made almost every day. The Paris Club has announced a number of time bound debt service suspensions, in line with the offer, made by the G20, of the deferral (not/not the cancellation) of interest and principal payments (see the WCO June 2020 brochure for more on the terms and conditions of the G20 offer). Among the countries which have recently gone the Paris Club/G20 route are Côte d'Ivoire, Guinea, Togo, Comoros and Kyrgyzstan. The major bond rating agencies have downgraded several countries and a number of major financial institutions, not just the ratings of the emerging market group (the assessments of the rating agencies are very public, but their views and approach are generally in line with unannounced moves by private lenders). But, despite this, WCO has the impression that access to private capital markets by sovereign borrowers has remained very good during the pandemic, with the enhanced worldwide liquidity from the central banks of the developed countries supporting demand for debt issues by foreign entities. Also, interest rate spreads for emerging economies against the higher quality bond issues have, if anything, gone down, despite the debt downgrades. One key element of the availability of credit to emerging countries will likely be that the larger financial institutions, including banks and insurance companies, have reduced opportunities to lend in their domestic markets despite the increased liquidity mentioned above, but they are also under pressure from rating agencies and regulatory authorities to maintain high quality balance sheets, constraining them from buying too much lower quality emerging market debt.

July 15, 2020 update

The Bulgaria lev and the Croatia kuna became part of the European Exchange Rate Mechanism (ERM II) on July 10, with generally the same status as the Denmark krone, including fixed fluctuation bands around the Euro. More on this in the next WCO. At present, the Bulgaria lev is at about 1.75/1$US (based on the ERM II rate of 1.95583 per 1 Euro), the Croatia kuna is at about 6.73/1$US (based on the ERM II rate of 7.53450 per 1 Euro).

Zimbabwe has made several moves in the last few months to achieve greater control of the Zimbabwe dollar, as the challenges of managing its currency, and the balance of payments in general, in the time of the coronavirus pandemic, are complicated by other features of the Zimbabwe financial landscape, which include inflation of around 800 per cent, and continued efforts to increase the use of the Zim$, which was introduced again in 2019, after around ten years of the use of foreign currencies (retailers are now required to post prices in both US$ and Zim$). Among recent government actions has been the introduction of auction allocation of foreign exchange (a development which must be understood in the context of the evolution of Zimbabwe currency, described briefly below). Among the features of the auctions (weekly, with the first one held on June 23) are: authorized dealers are allowed to bid for foreign exchange, with successful bidders paying their bid price; the market rate they are allowed to charge their customers is the weighted average of the successful bid prices; bid forms submitted to the central bank by dealers must include the relevant invoice of the particular imports to be financed, and the economic sector to which the funds will be going. Bids are allocated among two broad purposes: seventy percent to “necessary” goods and services, and inputs to production; and, thirty percent to financial flows, such as disinvestment needs and payment of dividends abroad (these criteria, along with priority economic sectors, can be the basis for the rejection of particular bids). The sources of the foreign exchange offered by the central bank include a 30 day liquidating requirement for surplus foreign exchange receipts from exports. In announcing the successful bids, the Reserve Bank indicates the economic sectors to which the foreign exchange has been allocated.

The evolution of the Zimbabwe dollar over the last forty years has included periods of very high inflation beginning around 2005, resulting in two redenominations (ZWD to ZWN in 2006 at 1000:1, and ZWN to ZWR at 1000:1 in 2008); a period of ten years (2009 to 2019) with no Zimbabwe dollar, when reliance was solely on several foreign currencies; and then the re-introduction of the Zim$ (ZWL) in February 2019. During the period when the Zim$ was abandoned in favor of the use of foreign currencies only, there was a shortage of small currency denominations for domestic transactions, so the government introduced “bond notes” in 2016, in small denominations for use in smaller transactions. In February 2019, the government introduced RTGS electronic money (ZWL), which was the anchor for money transfers using mobile phone networks (ECOCash, One Money, MyCash, and Telecash). But, with very high inflation expansion of the money supply, the official exchange rate was not allowed to fall fast enough, so a parallel market developed, with the street parallel rate for foreign exchange trading “guided” by the widely-quoted OMIR rate, which is determined by the effective exchange rate resulting from the purchase of the Old Mutual (and other similar) stock for Zim$ in Harare, and then its sale for foreign currencies on foreign stock markets where the company stock is listed(such as pence/share on the London Stock Exchange, or in South Africa dollars on the Johannesburg exchange). The use of foreign currencies was banned in June 2019, and Zim$ coins and notes were re-introduced in November 2019. Prior to the foreign exchange auctions mentioned above, government moves to eliminate the parallel market have included attempts to reduce the OMIR market, such as banning trades in Feb 2020 of Old Mutual and other multiple currency stock, and then closing down the entire Zimbabwe Stock Exchange on June 26. There have also been attempts to get greater control over mobile money transactions, culminating in a ban on such transactions on June 26, the intent being to shift such transactions to the formal banking sector, over which the government can exercise greater control.(At present, the official Zim$/1US$ rate is about 66, and the parallel rate is about 122.)

July 21, 2020 update

There have been reports that a barrier to developing countries taking advantage of the G20/Paris Club proposal for deferral of debt payments to official borrowers (now widely known as DSSI - described in WCO last month) is that it would be regarded as an act of default by their private sector creditors and/or 3rd parties (such as bond rating agencies). To help overcome this barrier, the Institute of International Finance has issued a template (draft agreement) which developing countries can send to their creditors, requesting a waiver from such treatment. The template notes (and WCO has also heard) that some creditors have suggested to clients that even talking about the deferral program with official creditors would be regarded as an act of default, with consequences for future borrowing – the waiver addresses this point. The template suggests the waiver is needed more for loans than for bonds. Excerpts from the template (published on the IIF web site on July 10, 2020) include the following: “The attached template waiver letter agreement is provided to assist in dealing with potential events of default which may arise under private sector financing documentation as a direct consequence of an eligible country deciding to participate in the G20/Paris Club DSSI. It is possible that potential events of default may arise as a result of entering into discussions, agreeing to participate in and actually participating in the G20/Paris Club DSSI even if only with official creditors. This template waiver letter agreement addresses all such possibilities...you [the lender] consent to the G20/Paris Club DSSI Participation and waive any default or potential event of default which would be triggered or any remedy which would otherwise arise under the provisions of the Debt Arrangement, in each case, as a result of G20/Paris Club DSSI Participation…you [the lender] shall not take any enforcement action, including any action to accelerate any payment obligations under the Debt Arrangement, or pursue any other remedies arising as a result of the deferral of the principal and interest agreed with any official bilateral creditors under the G20/Paris Club DSSI or any associated remedy arising as a result of the G20/Paris Club DSSI Participation (whether as a result of breach of obligations or otherwise) ”.

(World Currency Observer will next be updated on August 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.)