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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

December 1, 2016 (see December 7 and December 14 updates below). Next update: January 4, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).

There have been a number of events in November, all of which add up to strength for the US dollar against all the other currencies of the world. The reaction to this has been mixed–for example, US$ strength is welcomed by Japan, but is a a source of concern for China (more on this in a moment). Several things are coming together. A feeling that interest rates are too low (expressed, for example, by UK Prime Minister May) is being supported by increases in interest rates in financial markets, so far mostly for longer maturities. Major oil producers, especially Saudi Arabia, the biggest, are feeling the impact of low oil prices, so there are strong incentives for oil exporters, OPEC members for sure, but also non-OPEC members (of whom the biggest include Russia and other USSR countries) to reach agreement at the current OPEC meetings for slow-downs in production to increase oil prices (but what will the new US administration do–Mr. Trump says he wants to increased US oil and gas production as a top priority). There is the abrupt halt, and perhaps some reversal, of globalisation in the Pacific Rim, with the forthcoming death of the Trans-Pacific Partnership agreement. The United States is poised to make taxation and other changes, intended to get US corporations to bring back to the United States their offshore holdings of cash. It has all added up to a stronger US$ throughout the month, a movement which started to occur even before results of the US presidential election on November 8. In the big picture, one component is the 2% downward movement in the China renminbi yuan in November (down 8% since this time last year). The yuan continues to be affected by capital outflows, with Chinese nationals looking for investment opportunities outside the country, driving the yuan down at the same time as growing political pressure in the United States to somehow push the yuan higher, on the belief that this will have a positive impact on US jobs. Another piece of the picture: the November weakness in the Japan yen (down 7%, but still more than 8% stronger against the US$ than this time last year), which has helped Japan interest rates to move above zero for the first time in several months. There was also, in November, a 3% downward movement in the Euro and in currencies with a strong Euro influence, especially East Europe currencies and also Russia (closer to 4%). WCO also notes that Italy will hold a national referendum next Sunday (December 4) on structure-of-government changes, which would speed up legislation by reducing the powers of the Italian upper house (the Senate).

The Mexico peso was down 10% in November, while the Iceland krona moved up in November, and is now up more than 15% since this time last year. The Brazil real fell by 7% on the month, but is still up around 10% since this time last year. The Colombia peso fell by around 6 ½% on the month - the Chile peso was down by more than 3% on the month, but up around 5% since this time last year. As noted above, the Euro is down 3% on the month, the same movement as most other European currencies, except for the Poland zloty (down more than 5%) and the Turkey lira (down nearly 10% in November) The Russia rouble fell by around 4% in November, with the Azerbaijan manat and the Georgia lari each down by around 5% . The result is that the Georgia lari has moved down slightly since last year, but there has been a nearly 70% decline since a year ago for Azerbaijan (Azerbaijan and Georgia share a common border). The UK pound strengthened in November, but is down 21% since this time last year. The Swiss franc weakened a little in November, but is still up since this time last year. China yuan is down 2% on the month and 8% since last year (as noted above). The Egypt pound was floated on November 3 (see WCO November 2016), and the end result has been, as reported, a steep decline in November, from 8.9/US$ to around 18/US$. Also falling sharply in November was the currency of Egypt’s southern neighbor, the Sudan pound. The Democratic Republic of Congo closed some of the gap between the official and parallel exchange rates by lowering the value of the official franc to 1170 – the parallel rate is in the 1500 range. The Mozambique metical was up by 5% in November, but still down around 70% since this time last year. Oil prices are down nearly 10% on the month in the run-up to the current OPEC meetings (see above). Gold and silver prices were down by 6-7% on the month, but still with solid double-digit increases since this time last year. In the world of commodities, rubber prices are up nearly 50% since this time last year.

The conversion in India of the larger denominations of rupee bills, intended to bring to light the underground economy (see WCO November 2016), has had little apparent impact on the rupee, which fell around 3% in November, the same as movements in many other currencies around the world during November. The Pakistan rupee was steady on the month.

December 7, 2016 update

OPEC (the Organisation for Petroleum Exporting Countries) has announced a 3.7 % decrease in daily production by its members for six months, beginning in January 2017. OPEC non-members, such as Russia, were consulted and, in particular, OPEC says Russia will participate in the reduction. Indonesia, which said it was not in a position to cut production as much as it was requested by OPEC, is not participating in the freeze, and its OPEC membership is temporarily suspended. (Indonesia noted that it is a net importer of oil, and, if world oil prices rise as a result of the OPEC move, would prefer to rely on more domestic production.) The other OPEC non-participants are Libya and Nigeria, both, in effect, exempted from participation. A technical remark: looking at OPEC production and demand numbers, the real OPEC goal may be a freeze in 2017 daily production at 2016 levels, perhaps easier to achieve than a reduction. But, if achieved, this would still constitute significant upward pressure on oil prices (with daily supply for 6 months to be below anticipated demand), and would also be in line with what Russia said it would support prior to the meeting, i.e., a production freeze. Another important non-OPEC member, the United States, has, of course, a different approach to these matters, as does Canada. Oil prices began 2016 in the just-above US$30/barrel range, but have strengthened gradually over 2016, rising above $40 in April and, over the last month, have at times been over US$50/barrel.

December 14, 2016 update

The United States Federal Reserve system is raising interest rates under its influence by ¼ of 1% (resulting in a federal funds rate target range of ½ to ¾ of 1%, a 0.75% rate payable by the Fed on bank reserves, and a Fed discount rate of 1.25%) The move is consistent with a view in United States policy circles that interest rates have been “too low” for several years, and that this increase constitutes “normalisation” of interest rates, and is therefore not intended to slow down the United States economy. The last increase was a 1/4 of 1% increase in December 2015 (some WCO staff suggest that a ¼% increase each December may become the Fed’s annual Christmas present). Looking forward, currency markets will be digesting this interest rate increase, as well as any upward movement in oil prices from the forthcoming OPEC-announced tightening of world oil production.

(World Currency Observer will next be updated on January 4, 2017. Happy New Year from WCO. Visit Search to look at past issues of World Currency Observer (brochure edition).)