Headline for .     The US dollar has strengthened against a broad range of world currencies since the start of 2018.     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 1, 2020 (see April 15 and April 29 updates below). Next update: May 4, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

A few notes on the world-wide coronavirus pandemic (the numbers WCO has seen suggest the per capita impact has, so far, been the highest among central and southern European countries, and also that the worldwide impact has not yet reached a peak). Despite the social distancing and “stay at home” requirements, currency markets (and other financial markets) are functioning smoothly, which would likely not have been the case twenty five years ago, before nearly everything was internet-based. The foreign exchange-related impacts in March included massive declines of many worldwide currencies against the US$ in the middle of March (generally attributed to capital looking for a “safe haven”), but then these declines were, in most cases, reduced or even eliminated in the last two weeks of March. But, another major influence on currency markets has been a collapse in world-wide petroleum prices, which had begun in the last week of February, before the pandemic was recognized as being world-wide, rooted in the March 8 expiry of a 4 year-old petroleum production coordination agreement between two of the world’s major producers, Saudi Arabia and Russia –the oil price fall is good for the currencies of oil importers, and bad for those currencies of non-Middle East exporters which are not fixed against the US$ (and had a major impact on currencies over three weeks before the exchange rate impact of the pandemic had taken hold). From a foreign exchange standpoint, government spending and taxation measures (targeted on the immediate alleviation of incomes and employment lost due to business shutdown) are overwhelmingly more important, right now, than the worldwide action by monetary authorities to pump liquidity into financial systems, partly because policy interest rates in major countries are already close to or at zero, or even below zero, and have been for some time (the current monetary policy actions will, however, be felt more when world economies start their recovery after the pandemic winds down). One big exception: the actions by the U.S. Federal Reserve to provide additional US$ liquidity in the United States, a move targeted at U.S. credit markets, but one which will also help fund the increased worldwide demand for US dollar-denominated holdings (which was strongly felt in the middle of March). Several changes made in response to the coronavirus will have long-lasting impacts. One of these is a suggestion that the Brexit process, for the exit of the United Kingdom from the European Union, be postponed-even if this does not happen, there will be interruptions in parts of the process. And some of the temporary modifications of international interest and debt payments, to deal with cash flow interruptions related to the pandemic, could easily become longer term – they will, at least, stretch a little beyond the declared end of the crisis, to allow those affected to get back on their feet.

 Swiss franc and Euro Jan to March 2020

The Mexico peso fell by nearly 19% in March against the US$, and the Canada dollar was down by nearly 6% (after an even larger decline in the middle of March against the US$ was largely reversed-the Canada dollar is down by 6% since this time last year.) The Jamaica dollar moved up by 2.5% against the US$ in March, and the Costa Rica colón was down by 2% (but up by 4.5% against the US$ since this time last year). South America currencies generally fell against the US$ in March, with the largest movements being 16% declines by the Brazil real, and the Colombia peso, against the US$. Exceptions among South America currencies were the Suriname dollar, up by 2.5% in March against the US$, and the Peru sol rose by 0.6%. The net movement of the Euro on the month was a very small downward movement, but, as mentioned above, the Euro rose strongly at the beginning of March, then fell strongly in the middle of the month, then rose strongly over the last weeks of March. The United Kingdom pound fell by around 3% against both the US$ and the Euro in March. The Norway krone, a petro-currency, fell by nearly 11% against the US$ in March. In Eastern Europe, the Czech Republic koruna fell against the Euro by 7% in March, and the Turkey lira was down by 6% against the Euro. The Russia rouble fell by nearly 21% in March against the US$. Currencies among former USSR countries which also experienced significant declines, in the 15% range, were the Belarus rouble, the Georgia lari, the Kazakhstan tenge, the Kyrgyzstan som and the Ukraine hryvnia. The Uzbekistan som was steady in March against the US$. The Iran riyal fell by nearly 10% in March against the US$. The Israel shekel was down by around 3.5% in March against the US$, but is up by1.5% since this time last year. The South Africa rand fell by 14% against the US$ in March, and is now down by 24% since this time last year. The Morocco dirham fell by 4.5% against the US$ in March (roughly the same fall against the Euro.) The Nigeria central bank made several interventions in Nigeria's multiple exchange rates, which effectively devalued the naira by around 15% against the US$. The Ghana cedi was down by 5.5%. Many Asian currencies declined against the US$ in March 2020-for example, the Japan yen fell by 3% in March, and the China yuan was down by around 1.5%. Among Asian currencies, however, the net movement of the Philippines peso and the Taiwan dollar were around zero against the US$ in March. And, the Myanmar kyat was up more than 3% against the US$ in March, and is up by 8% since this time last year. Gold prices followed the trajectory of many currencies over the last two months, with a spike in late February, followed by a sharp fall in the first two weeks of March, followed by another sharp rise in the latter part of March, which left gold with no net change in price over the month of March. Cotton prices in US$ terms fell by more than 17% in March; there are many varieties of rice traded in international markets, but, looking over the entire range, worldwide rice prices in US$ were up by 10% in March, and are up by more than 20% since this time last year.

Argentina imposed, on December 23, 2019, a 30% tax on the purchase of foreign exchange by Argentina residents (the tax also applies to a number of other foreign exchange transactions, such as foreign exchange purchased through credit card transactions). A number of other countries, whose fiscal pressures are not in the same league as that of Argentina, also have taxes on foreign exchange purchase, although there are variations in how they are designed. There are two approaches: a tax on the sale (ask) exchange rate quoted for foreign exchange by the foreign exchange seller (such as an independent cambio, or a bank/financial institution which offers the sale of foreign exchange along with many other types of financial services); or, a value-added tax on the gross value of the financial service offered by the foreign exchange dealer, with the tax base being the difference between the foreign exchange ask (sell) price and the bid (buy) price. Over the last 30 years, the world has moved away from sales taxes and toward value-added taxes on the entire range of goods and services, but financial services have generally been exempted from value-added taxes, due in part to concerns that difficulties in correctly defining the tax base might lead to distortions in financial markets. Also, many years ago, there was a general rejection of the proposed Tobin tax on all sales of foreign exchange, one intention of which was to reduce the incentive for multiple foreign exchange transactions in short periods of time (such as high frequency trading), viewed as contributing to short-term capital flows which were seen as destabilizing. Despite these concerns, some countries besides Argentina have sales taxes or value-added taxes on the sale of foreign exchange. These countries include: India (“ the Service Tax on forex transactions, which is a value added tax of 18% on the sale of foreign exchange [which works out to around 1% on the gross amount for smaller amounts, falling to around 0.1% for larger amounts]… transactions amongst banks or authorized dealers or between banks and dealers are exempted”); Bermuda (“all foreign currency purchased by a resident of Bermuda from a local bank is subject to a 1.25 per cent tax”); and Turkey (“0.1% tax since the middle of 2019” on the sale of foreign exchange).

April 15, 2020 update

Mid-April 2020: with regard to the coronavirus (COVID-19), news on the scale of the impact is continuing, and already-announced assistance to replace lost personal incomes began to flow out last week. The most important exchange rate-related coronavirus event around the world last week was the release, in every country, of the first official measurements of the economic impact of coronavirus business shutdowns, which were intensified on and after March 14 (although, accurate non-official measurements already existed in virtually every part of the world, based on the knowledge that economic activity in whole sectors was being sharply reduced – tourism, accommodation, personal food service, airline travel, non-essential medical services, etc). Official March measurements of employment have been released in most countries, and forthcoming shortly will be March measurements of industrial production (manufacturing, mining, electricity and gas utilities ), which are narrower than Gross Domestic Product measurements-the GDP measurements will comprehensively assess the impact on the service economy, which is more “person-to-person”, and, as such, has been more affected by health policies intended to ensure that people keep a “safe” distance from each other. Official measurements of Gross Domestic Product for the first quarter (January, February, and March of 2020) will start being issued at the end of April, but even these measurements will not include the April 2020 actions-these will be part of the 2020 second quarter GDP measurements, not to be released until the middle of the summer. Exchange rate impacts of the coronavirus have been moderated by the fact that the shutdowns occurred in service sectors whose goods are not generally exported (e,g, food service, retail stores, elective medical and dental procedures), and, even in these cases, activities involved did not totally disappear, but were often diverted to modes of delivery which do not involve physical contact, so the activities have not disappeared, implying better chance of recovery when the pandemic dies down. Also important: many activities have been deferred, not cancelled (such as non-essential medical and dental procedures). Also working to lessen exchange rate impacts: governments have excluded supply-chain relationships from travel and other restrictions (but they can do nothing about the complete absence of international tourist travel). There will certainly be greater pain in the less developed countries, which may not have the resources to fund lost incomes and additional health care expenditures, so initiatives by public and private lenders in the direction of debt relief looks very important. Every multilateral institution of which WCO is aware has announced information on aid to help lower-income countries respond to the corona virus, and private lenders around the world have made plans to help clients cope with the impact. For example, the International Monetary Fund (in its role as the major non-private-sector lending institution to lower income countries) has announced a six month “debt service relief” for Afghanistan, Benin, Burkina Faso, Central African Republic, Chad, Comoros, Congo, D.R., The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Tajikistan, Togo, and Yemen. There is also a growing list of other countries who will receive assistance from the IMF related to corona virus needs, helping to unlock assistance from other private and public borrowers.

April 29, 2020 update

Price data for a broad range of commodities, traded and non-traded, are required to make a data-based assessment of the appropriate value of a currency (recognizing that the real test is by finding the value that balances supply and demand among competing foreign-exchange market makers). The temporary closure or scaling-down of all retail outlets during the coronavirus (COVID-19) pandemic means that many indications of consumer prices (which feedback to prices higher up the production chain, prices which are directly captured by the GDP deflator) are historical, based on what they were before the pandemic (although that doesn’t mean they will always prove to be wrong). What is the price of a good or service offered at a storefront which has been closed for weeks, when the date of re-opening is uncertain, when most of the skilled labor required for full (i.e., profitable) production has been sent home, and when internet-based alternative supply is not fully developed for the majority of vendors? Even contractual prices, such as rents, are often being modified (or, at least, deferred) due to difficulties in making payments. The range of wholesale commodity prices (for necessities such as food, which continue to flow to the market) are more reflective of actual demand, but, even here, developments are interesting, such as the movement of the near-to-expiration May 2020 futures price of oil to negative $37 a barrel on April 20 (one day before expiry of trading, when traders were closing out and rolling over to the June 2020 contract, the price of which was not negative). This one-day occurrence of a negative futures price partly reflected the fact that sellers of oil (who are facing a world-wide supply glut) are running out of storage space, and had an incentive to structure their net charge per barrel of oil so that buyers had a very strong incentive to accept oil delivery, relieving storage pressure on oil suppliers. (Negative prices also occur from time to time in markets for the flow of wholesale electricity, but for a different reason.) It should also be added that for the assessment of the appropriate value of prices for a range of commodities, the basket of goods and services varies from country to country. One of the major currencies for which this is very explicit is India, which publishes consumer price indices with different baskets of commodities for rural and urban residents. National real estate prices are also an influence on currency values, and while they are amortized in consumer price indices so that they are similar to rental payments, their influence on currencies is stronger than indicated by price indices, because a real estate purchase by a non-resident is similar to a capital flow; in either case, real estate constitutes another group of prices whose current values are, with the sharp decline in real estate transactions, to some extent, historic at this moment.

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