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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

December 2, 2020 (see December 16 and 30 updates below). Next update: January 5, 2021. Visit Search to look at past issues of World Currency Observer (brochure edition).

Of the roughly 175 currencies around the world (an exact count has to be qualified by, among other things, multiple currencies in single countries), the vast majority have moved up against the US$ in November, and almost as many have gone up against the US$ since this time last year. Among the exceptions, the currencies of former USSR countries have been generally weaker against the US$ in November, but there were increases by the Kazakhstan tenge, and also by the Russia rouble – the rouble was up by 4% in November, but is down by nearly 19% against the US$ since this time last year. Another exception is the Thailand baht, which rose against the US$ in November, but weakened against the US$ since this time last year – there has been a great deal of debate in Thailand, suggesting that the strength of the baht has been a major reasons for a reduction in the international competitiveness of the Thailand economy (and reports that the Federation of Thai Industries has indicated a preferred value for the baht). The Mexico peso is down by 3% against the US$ since this time last year (but rose by 5.7 % in November), and the Iceland króna is down by 8.5% against the US$ since this time last year (but rose by nearly 6% in November). South America currencies have been generally weaker against the US$ since this time last year (although mostly stronger in November). The Brazil real was up by more than 7% against the US$ in November, but down by 26% since this time last year. The Haiti gourde gave back its strength of previous months, falling by 6.5% against the US$ in November, but still up nearly 30% since this time last year. The Sierra Leone leone fell by 1% against the US$ in November, and is down by 5% since this time last year. Looking at the performance of world currencies against 3rd currencies, the story is more nuanced, although it is more clear in connection with the Euro: the Euro has risen by nearly 8% against the US$ since this time last year (up nearly 3% in November), so virtually all non-US$ currencies around the world have weakened against the Euro over the last year, although their November performance is more mixed. Also, in November, many currencies have strengthened against the Japan yen (the yen was up slightly against the US$), while the performance against the China yuan, which rose by 1.7% in November against the US$, has been mixed. Commodities markets: metals prices in US$ terms generally rose in November, with the exceptions of gold and silver. World oil prices are down by 20% since this time last year, while North American natural gas prices are up by more than 25%.

There have been more announcements in November of the possibilities of the introduction, around the world, of effective vaccines against Covid-19. WCO is hearing that these announcements should be regarded with cautious optimism but, nonetheless, they are regarded as largely responsible for rises in world equity (stock) markets, which are also being supported by interest rates that are close to zero in many countries, and by increased world savings due to reductions in consumption. As to explanations for stronger currencies around the world against the US$, trade deficits and current account deficits are down in many countries, as economies weakened by the pandemic are less able to finance imports. Also to be noted is that the smaller tourism-based economies have turned out to have had an advantage in the fight against Covid-19, because they are often islands (many of these economies have fixed exchange rates). One divide in the influence of trade deficits on currencies is between emerging and developed countries. Emerging countries have less capacity for borrowing, so reductions in trade deficits (increases in surpluses) can flow through more to their currency performances. Developed countries can cushion trade performance with borrowing or from their savings, so there is less of a trade deficit-currency link. Also to be mentioned are the examples of countries which are posting current account surpluses during this year of the pandemic, which include China, Japan, Germany, Taiwan and Vietnam.

The Liberia dollar was just one of the currencies of the world that rose against the US$ in November 2020, but its upward movement was among the largest in the world: up by over 18% in November (much more than the 2.5% rise of the CFA franc, for example, which is anchored to the Euro), to around 155/1$US. The situation in Liberia is notable for several reasons: the economy is highly dollarized (one measurement: 2/3 of bank deposits are denominated in US dollars), and there has been a shortage of Liberian currency notes in the last few months, which has occurred against a backdrop which includes the implementation of an orderly de-dollarization strategy over the last 10 years, which has included open discussions at economic and financial fora. So the downward pressure on the US$ against the L$ means that the person-in-the street wants to sell US$ and buy Liberian dollars, but finds there is a shortage, which has not only increased the value of the Liberia dollar, but also means that out-in-the-street cash transactions can occur at an exchange rate which is better than inside the bank. The central bank has just confirmed that the central bank policy interest rate is being maintained at 25%, against an inflation rate of around 15%. The central bank also indicates that foreign exchange reserves are below the 3-months-of-imports finance benchmark, and also a worsening trade balance. Liberia (population: 5 million) is on the west coast of Africa, its primary commodity exports are rubber and iron ore, and the countries surrounding Liberia are Sierra Leone (currency is the Leone), Guinea (Guinea franc) and Côte d'Ivoire (in the CFA franc zone).

December 16, 2020 update

Pandemic developments to date: Covid-19 daily new cases and related deaths are rising in many places around the world, but financial markets are more focused (optimistic) on the start of the distribution of vaccines, although, WCO understands, it is far too early for them to have an impact on the grand totals of daily new cases and Covid-19-related deaths.

The president of Cuba has announced that Cuba will begin, on January 1, 2021, a six month transition from two currencies (the CUC peso, which has been the foreign currency stand-in since the 2004 ban on the US$ in Cuba (cor.), and the national peso) to one currency (the national peso), with the national peso to be set at 1US$ buying 24 pesos, which is equivalent to what it has been for many years. A careful reading of the many public statements by Cuba government officials leaves open the door that Cuba may also, around the same time, announce a devaluation of the Cuba national peso from 24/1$US. While the currency change will have little impact for visitors and others who need to exchange into Cuba currency to purchase Cuba goods and services, simply that they will now pay directly in foreign currencies without first converting into CUC pesos (which has been possible for a while, although not publicized), there will be more impact for Cubans, whose CUC bank accounts will be converted to national pesos, and whose cash CUC holdings must also be converted. Government officials have suggested there will also be adjustments to a wide range of wages and prices, which will go beyond exchange rate adjustments, with the intention of protecting purchasing power through the transition, and with the broader goal of stimulating the Cuba economy during the Covid-19 pandemic. There are a number of backdrops to the rollout of the change to the peso: inflation in Cuba is, essentially, zero, so there is little pressure from this source to devalue; a professed desire by Cuba, expressed over many years, to eliminate its dual currencies (which are part of its communist heritage, based on the idea of foreign exchange certificates); Cuba has been, largely, very successful in its fight against the pandemic; and, Cuba has controlled dollarization through use of the CUC, even after the enormous economic pressures after the 1989 disappearance of the former Soviet Union; and that there is a good chance that the new Biden administration will reverse measures connected with President Trump’s re-imposition of the economic blockade against Cuba.

As the days count down to the December 31 deadline for a Brexit agreement between the European Union and the United Kingdom, which would have the UK leave the EU under the umbrella of a broad trade agreement, UK PM Johnson and European Commission President von der Leyen have issued the following statement on 7 December 2020 “As agreed on Saturday, we took stock today of the ongoing negotiations. We agreed that the conditions for finalizing an agreement are not there due to the remaining significant differences on three critical issues: level playing field (comparable government laws and regulations in the UK and the EU so that no side has a competitive advantage), governance (how trade agreement disputes would be resolved, which would include rules for retaliation in case of disagreements) and fisheries (EU access to UK waters).We asked our Chief Negotiators and their teams to prepare an overview of the remaining differences to be discussed in a physical meeting in Brussels in the coming days.” The Ireland/Northern Ireland border was anticipated to be the most contentious issue, but this appears to have been resolved, in the context of a separate agreement. The above-mentioned other issues are, however, very fundamental to a meaningful agreement and, if they have not been resolved at this late date after years of discussion, chances are that any Brexit agreement that emerges in the next few weeks would be very narrow. One scenario is for a no-agreement period followed by an agreement in the middle part of 2021. Note: the UK pound per Euro exchange rate has increased (i.e. weakened) over the last 2 weeks, but the pound has also generally followed the Euro in getting stronger against the US$.

 Euro and UK pound 2020 January to December

December 30, 2020 update

The United Kingdom and the European Commission have reached a post-Brexit free trade agreement, described by the UK PM (Johnson) as Canada-style (similar to the recent Canada-EU free trade agreement), the heart of which is that tariffs and quotas on UK-EU trade in goods are to be set at zero (“Except as otherwise provided for in this Agreement, customs duties on all goods originating in the other Party shall be prohibited”) but there will now be customs checks on goods moving across borders. In reading the agreement, WCO focuses on issues related to exchange rates, primarily trade and the location of direct investment (to reach the European market), and on financial services (on this topic, there is one of 15 Joint Declarations, with this one saying that the EU and the UK will draw up a Memorandum of Understanding on cooperation on financial services issues by March 2021). At the end of this week, the UK will be out of the EU single market and customs union but, in the words of the EU summary (and the text of the agreement): “Both parties have committed to ensuring a robust level playing field by maintaining high levels of protection in areas such as environmental protection, the fight against climate change and carbon pricing, social and labour rights, tax transparency and State aid, with effective, domestic enforcement, a binding dispute settlement mechanism and the possibility for both parties to take remedial measures.” Withdrawal of the EU from fisheries activity in UK waters is to be gradual, with reductions spread over at least five years (the Johnson summary says the EU share will fall from 1/2 to 1/3 over that time period). The heart of the dispute settlement mechanism is a Joint Partnership Council, providing for consultations aimed at reaching an agreement over differences; the agreement notes that both parties also have available to them the range of remedies available through the World Trade Organisation (such as anti-dumping rules), if disputes go that far.

Next week, WCO will talk about Switzerland and Vietnam being declared currency manipulators by the United States, and about recent currency devaluations in the Middle East (official and parallel markets).

(World Currency Observer will next be updated on January 5, 2021. 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.)