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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

July 6, 2016. (See July 20 update below). Next update: August 3, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).

After the June 23 BREXIT vote in the United Kingdom, in favour of eventually leaving the European Union, the UK pound fell by 6.5 % against the US$ and 8.5% against the Euro until June 29. The pound then fell an additional 1% against both currencies after June 30, when Governor Carney (who plans to stay at the Bank of England) indicated an interest rate cut in the UK will happen soon, probably in the middle of July (“some monetary policy easing will likely be required over the summer…the [Monetary Policy] Committee will make an initial assessment on 14 July)”. Chancellor Osborne made a one-day-later statement which softened the government’s thrust for a balanced budget by 2020. (“we will continue to be tough…but we must be realistic”). (WCO notes there was further weakness of the pound against the US$ and the Euro on Tuesday, July 5.) (Update: the Bank of England did not change its interest rates on July 14.)

BREXIT was June 23 2016

Many currencies around the world weakened against the US$ immediately after the “Leave” result of the United Kingdom BREXIT vote was known on June 23, but these currencies generally strengthened later in the following week. Looking at movements of currencies over the entire month of June (i.e., smoothing out the ups-and-downs of the month) suggests that the Euro was little changed over the entire month of June, while the Japan yen rose by more than 6% against the US$. The Argentina peso fell by more than 8% in June, while the Brazil real rose by more than 10% (Brazil, shortly to become the Olympic host, is in an economic recession). The UK pound fell by more than 10% in June against the US$. The Russia ruble was up by about 3% in June against the US$. In Belarus, the Belarus ruble has been redenominated as of July 1, 2016, eliminating 4 zeroes from the ruble (a movement that has been planned since 2009). The South Africa rand was up nearly 7% against the US$ in June, and down more around 19% since a year ago. Asian currencies were generally stronger against the US$ in June, but were generally down against the Japan yen. There were comments on how silver prices have been rising faster than gold prices, and also about the rally in sugar prices. But there have been sharp upward movements in some other commodities, such as coffee, and also North America natural gas prices .

The Bank for International Settlements issued, on May 26/16, an update of its ongoing work on the development of good practices (guidelines) for wholesale foreign exchange trading – the key stated objectives are to have robust, fair, open, liquid and appropriately transparent foreign exchange markets everywhere in the world. There has been a focus on Annex 1: Illustrative Examples, which offers a number of examples (of conversations among traders, and of orders from clients) to illustrate differences between good and bad practices. The examples are of: requests for market color (inappropriate is when this information is not properly aggregated or anonymized, such as identification of the activities of a particular institution); the execution of stop loss orders (inappropriate includes when the broker sells ahead of a stop loss order to such an extent that he helps trigger the execution of a stop loss);pre-hedging practices (inappropriate can be when a pre-hedge transaction is executed, but with too much delay in the execution of a request from the client for a similar transaction); and mark up charges on foreign exchange transactions (appropriate behaviour is to inform the client that mark-up is charged, and to provide information on how the mark up is determined for particular transaction). The target date for the final version of the foreign exchange guidelines is May 2017.

Expansion of the Panama Canal, which links the Atlantic and Pacific Oceans and which will have a huge effect on global shipping commerce, has been completed, and the new capacity has been available as of June 26. The locks are larger, and there is now room for a 2nd lane of traffic.

July 20, 2016 update

Zimbabwe abandoned its national currency in 2009 due to hyperinflation, and since then has designated eight foreign currencies as legal tender, although the principal currencies in use have been the US$ and the South Africa rand-in the last two years, the principal currency in use has turned out to be, by far, the US$. To ensure that there were enough small denominations of currency available in Zimbabwe for small transactions, and to address the larger issue of avoiding cash shortages, the government has issued, since December 2014, a limited amount of small denomination coins. These have been called Zimbabwe bond coins, in US dollar values of 1 cent, 5 cents, 10 cents, 25 cents and (in March 2015) 50 cents, each of which was backed by government holdings of US dollars, with total bond coin issues capped at US$50 million (more precisely, the backing consists of a $50 million US$ credit line, or bond facility, hence the name bond coins). But recently, a broader cash shortage problem has been happening, attributable in part to Zimbabwe trade deficits, which have reduced the amount of US dollars available for circulation in Zimbabwe (contributing to the deficit has been drought conditions, necessitating increased food imports). The trade deficit has also meant a problem of a shortage of foreign exchange to finance necessary imports. Among the measures announced to deal with the shortage of US$ for in-Zimbabwe transactions is the planned issue of Zimbabwe bond notes, beginning in October, in denominations of $2, $5, $10 and $20, backed by a US$200 million credit line. The government has characterised the bond coins as vouchers, and says they are not intended to be a step towards re-introduction of a Zimbabwe national currency. The forthcoming bond note issue can be characterised as the most visible part of many measures to resolve the twin issues of a US$ cash shortage for in-Zimbabwe transactions, and foreign exchange shortages. For example, other announced measures are intended to increase the in-Zimbabwe use of the South Africa rand, to ease the local demand for increasingly-less-available US dollars. (“ view of the fact that most products in Zimbabwean shops are from South Africa, it is pertinent that shop owners and businesses should think in Rand terms as opposed to abstract USD prices.)” To address the issue of the foreign exchange shortage, Zimbabwe banks have been given very specific “guidance” for the distribution of foreign currency towards competing demands, with higher priority to be given to imports deemed the most essential. Another measure is that, since May 5, 2016, US$ foreign exchange proceeds deposited at the central bank are to be converted to South Africa rand (90%) and Euros (10%).

(World Currency Observer will next be updated on August 3, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).)