Headline for .     Amidst the broad weakness of the US$ since November 2017, a group of currencies has emerged which have steadily weakened against the US$ since the beginning of 2018, which include: the India rupee, the Pakistan rupee, the Brazil real and the Canada dollar.     WORLD CURRENCY OBSERVER thanks readers for comments. In any language, on any topic, send them to renaissance@briargreen.com.    
World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

April 4, 2018 (see April 18 update below). Next update: May 2, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

The announcement that China will retaliate against US aluminum and steel tariffs by going ahead on April 2 with 15% tariffs on 120 (mostly agricultural) products from the US, and 25% on an additional 8 products, means that a trade war is underway. One question is the extent to which the US measures and the China response comply with (or ignore) the international trade “rules of war” embodied in World Trade Organisation agreements (which go back as far as the end of World War II). See below for more background, and there will be more in future WCOs on the technical relationship between exchange rate changes and tariff changes. (April 7 2018 update: The week continued with President Trump announcing that a list of 1300 products imported from China (value of products said to be around US$50 billion) would be subject to an additional 25% tariff, probably around the beginning of June following a consultation process. China then announced that it would impose tariffs on an additional 106 products from the United States, including soybeans and beef, with the same estimated value. There were then reports that the US is considering yet another round of tariff increases on products of value up to $100 billion-there were also reports that China has promised it will retaliate. WCO notes that US-China products shut out of each other’s markets will likely end up as exports to 3rd countries.)

The Euro was steady against the US$ in March, but is up by more than 13% since this time last year. The Japan yen strengthened a little in March, and is up by more than 4.5% against the US$ since this time last year. The Canada dollar fell by 1.6% in March against the US$, while the Mexico peso and Iceland króna both rose by around 2.5% in March against the US$. All three North America currencies are substantially stronger against the US$ than this time last year, with the króna up by 12.5%. The Nicaragua córdoba is down by 5.2% against the US$ than this time last year (down around 0.5% in March) - roughly the same movement since last year as the Dominican Republic peso. The Costa Rica colón moved up in March against the US$. The Chile peso decreased by 2.7% against the US$ in March, which left it up by nearly 9% on the US$ since this time last year. The Brazil peso, up by nearly 2.5% against the US$ in March, is down by 4.5% since this time last year. The Argentine peso steadied in March, and is down 31% since this time last year. In Venezuela, there as are the first whispers, from a domestic political group, of dollarization, in order to end hyperinflation. The United Kingdom pound strengthened against the US$ and the Euro in a month, with many BREXIT-related developments (see below), and is up by nearly 11% against the US$ since this time last year (down nearly 3% against the Euro since this time last year). The Sweden krona fell by 2.6%, and the Switzerland franc fell by around 1.5%, against the Euro in March. The Turkey lira fell by 5.5% against the US$ in March (approximately the same movement against the Euro), leaving it down 10% against the US$ since this time last year, and down by 27% against the Euro. The Ukraine hryvnia rose by 3.3% against the US$ (and against the Euro by around the same) in March, while the Russia rouble fell by nearly 3%. The Georgia lari rose by 1.5% against the US$ in March, while the Moldova leu rose by 1.1%. The Iran riyal fell by 3% in March, leaving it down by nearly 23% against the US dollar. After rising against the US$ in February, the South Africa rand fell back in March, leaving it up around 12% against the US$ since this time last year. The São Tomé and Príncipe dobra rose by 4% against the US$ in March. The Angola kwanza fell by 4.6% against the US$ in March, leaving it down by 29% against the US$ since this time last year. The Mozambique metical fell by nearly 6.5% against the US$ in March, which still leaves it up nearly 8% against the US$ since this time last year. The Liberia dollar fell against the US$ in March by more than 11%, and is down nearly 27% since this time last year. There was no net movement of the Nigeria naira in March, leaving it down nearly 17% since this time last year. The China renminbi yuan moved up by around 1/2 of 1% in March against the US$, and is up by nearly 9% since this time last year - it is currently at around 6.32/1$US. The Australian dollar fell against the US$ by 2.1% in March, and the New Zealand dollar fell by around 1%. The South Korea won moved up by around 1% in March against the US$, in a month when it agreed to modify its free trade agreement with the US in exchange for exemption from US aluminum and steel tariffs - up around 5% since this time last year. The Indonesia rupiah and the Philippines peso are both weaker against the US$ than this time last year, while the Taiwan dollar is 4% stronger against the US$ than this time last year. The India rupee weakened a little against the US$ in March, and the Malaysian ringgit moved up by 1%. The Pakistan rupee fell by 4.3% against the US$ in March, leaving it down by more than 10% since this time last year. The Thailand baht is up by 9% against the US$ since this time last year. Lastly, there has been a big jump in world cocoa prices over the last 3 1/2 months, and, as a result, prices are up over 20% since this time last year. The world's biggest cocoa producers include Côte d'Ivoire, Cameroon, Ghana and Nigeria.

The United States and South Korea have reached a deal which includes cancellation of the previously-announced US aluminum and steel tariffs on South Korea, in exchange for restrictions (a quota) on the quantity of South Korea steel exports to the US (70% of previous levels), and modifications to the South-Korea US Free Trade Agreement, which will include measures related to US motor vehicle exports to the South Korea markets.

There is now one year until the March 29/2019 BREXIT withdrawal of the United Kingdom from the European Union, and March 2018 saw exchanges of views between the UK and EU on the shape of the future relationship, which both sides see will be a very comprehensive free trade agreement, with the United Kingdom not formally remaining part of the EU customs union nor the single market (although many of the resulting measures will be the same, even if the labels themselves will not apply). Both sides are aiming for zero tariffs on goods, and there is recognition that other models will not work (the Canada goods-trade-centered agreement is not comprehensive enough, and the Norway agreement involves automatic implementation of EU laws, which goes against what BREXIT is all about). This is especially true as this will be a free trade agreement which loosens ties rather than increasing them. The UK Chancellor of the Exchequer (Finance Minister), talking about the negotiations, said that: “78% of European Forex trading and 74% of European interest rate derivatives trading takes place in the UK. Those who think that the major winners for any fragmentation of London’s markets [from a bad BREXIT deal] would be Paris or Frankfurt, Dublin or Luxembourg, should take note! The real beneficiaries are more likely to be New York, Singapore, and Hong Kong.” Goods agreements are about tariffs, and services agreements are about common rules, common supervision, and common enforcement, once again a difficult thing to achieve in the spirit of the BREXIT disengagement of the UK from EU legal jurisdiction. BREXIT cannot come fast enough for the UK fishing industry, which wants full control by the UK of UK fishing waters now, not until the agreed-upon date of December 31/2020. In a March 2/18 speech, PM May listed five UK hopes for the agreement: “[1] reciprocal binding commitments to ensure fair and open competition...[2] an arbitration mechanism that is completely independent – something which, again, is common to Free Trade Agreements...[3] we will want to make sure our regulators continue to work together...for everything from getting new drugs to patients quickly to maintaining financial stability...[4] we will need an arrangement for data protection. The UK has exceptionally high standards of data protection. But the free flow of data is also critical for both sides in any modern trading relationship...[5] as we leave the EU, free movement of people will come to an end and we will control the number of people who come to live in our country. But UK citizens will still want to work and study in EU countries – just as EU citizens will want to do the same here, helping to shape and drive growth, innovation and enterprise. Indeed, businesses across the EU and the UK must be able to attract and employ the people they need. And we are open to discussing how to facilitate these valuable links.

The US released a Section 301 study (a prelude to possible trade and investment restrictions, and the same process followed for the aluminum and steel imports, involving wide consultation and in-depth studies) on whether China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation are unreasonable, unjustifiable, or discriminatory and burden or restrict U.S. commerce. Among the findings of the US study: China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to force or pressure technology transfers from American companies; China uses discriminatory licensing processes to transfer technologies from U.S. companies to Chinese companies; China directs and facilitates investments and acquisitions which generate large-scale technology transfer; and China conducts and supports cyber intrusions into U.S. computer networks to gain access to valuable business information. The US responses are to include: representations against China at the World Trade Organisation; forthcoming additional tariffs on certain products of China (to include aerospace, information and communication technology, and machinery); and the development of measures to address China’s investment practices in the US which are deemed to involve the acquisition by China from the US of sensitive technologies The proposed tariff list is to be issued shortly [April 7 update: as noted above, these have since been announced]. And the US estimate of the harm to the US economy from the above Chinese measures is $50 billion per year (which is 10% of the $500 billion often cited as the total of Chinese exports to the United States).

There was an exchange of views between Canada and United States commentators on which country has a surplus with the other (sparked by banter by President Trump of a conversation he had with the Canadian Prime Minister). The exchange sparked a highly technical note by the US Council of Economic Advisers (part of the office of the US president) on Balance of Payments versus Customs approaches to the measurement of trade balances, and on trade balance measurements which include only goods versus those which also include services. The note included the following excerpt: “…consider U.S. bilateral trade balances with Canada. In 2017, the U.S. goods and services balance was a surplus of $2.77 billion. The goods alone balance on a BOP basis was a U.S. deficit of $23.16 billion, but on a customs basis it was a deficit of $17.58 billion. Note that the difference between the BOP goods and services balance and the BOP goods alone balance implies a trade surplus in services of $25.93 billion. In contrast, Canadian statistics report a goods and services trade surplus with the United States of $26.76 billion, using the Canadian BOP methodology. The goods alone balance is $40.50 billion on a BOP basis. One important difference in BOP methodology between the Canadian and U.S. approaches is the treatment of re-exported goods.” And speaking of Canada, it should be added that there are increasing reports in the US on the pain being felt by US consumers and businesses from product price increases related to recently imposed American tariffs on Canadian softwood lumber exports to the US, such as the impact on newspaper prices and availability from the anti-dumping duties announced on March 15 by the U.S. on Canadian newsprint.

April 18, 2018 update

There has been more discussion of the possibility of Italy issuing a parallel currency, moneta fiscale (fiscal currency), which would mean that Italy would have a 2nd currency circulating (in Italy) alongside the Euro; if the new currency happens (which looks unlikely at this point), goods and services would have two prices, one in Euros and the other in the units of the new currency. Moneta fiscale, if accepted for payments by the people and business of Italy (one inducement is that it could be made acceptable for paying taxes and purchasing government services), could fluctuate in value against other currencies (such as the Euro), thereby allowing the Italian economy to benefit from the “quick fix” of a depreciating currency, as opposed to the price and wage reductions necessary to correct for an external value of the Euro which is widely regarded as too high for the weak Italian economy (the Euro has appreciated nearly 14% since this time last year against the US$, and by around 2.5% so far in 2018). Moneta fiscale is regarded by its proponents and interested parties as vastly preferred to the alternative of having Italy leave the Euro; an important goal of proponents of the new proposal is to avoid the destruction of the Euro. Legal roadblocks to the issue of moneta fiscale, identified in a study the Bank of Italy issued late in 2017, includes the restriction that only the Euro can legally be characterised as legal tender in the Euro zone, and that the EU will legally have some say if the government of Italy chose to issue bonds payable in the new currency (the new currency itself wouldl be legally equivalent to a tax credit certificate). And practical problems include how to distribute the new currency among the public, and how much of moneta fiscale would be issued. One interesting part of the proposal is that individual certificates could first be used for payment of taxes two years after their date of issue, which would make them self-liquidating (although the government would then, of course, simply issue new certificates). It should be mentioned that the reason ideas such as moneta fiscale have gained adherents is a search for ideas (particularly among opposition parties) to increase economic growth in Italy, which is at around half the EU level, despite unemployment in Italy which is above 11%. And one question is how such a move would fit in among generally held views and experience with Euroisation, which the Euro equivalent of dolarisation.

(World Currency Observer will next be updated on May 2, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)