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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

March 2, 2016. (See March 16 and March 29 updates below.) Next update: April 6, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).

Both the Euro and the Japan yen were up in January against the US dollar - the Euro up by 1%, finishing at 1.09 US$/Euro; and the yen up by more than 6%, to 114 yen/US$. The strength against the US$ was also the case for many currencies around the world in January, but with several major exceptions: the South Africa rand (on the verge of having its debt downgraded to “junk” status), the India rupee, the South Korea won, and the United Kingdom pound (see below). With regard to rubber prices, the three countries representing the majority of the world’s rubber exports (Indonesia, Malaysia and Thailand) have agreed to a six month cut in rubber exports, in an effort to increase prices. And, with regard to movements in African currencies, a new direction will be more commitment by African countries towards economic diversification, based on the hard lessons learned by: dependence on oil exports (affected by oil price weakness and by lower demand for their oil); dependence on Chinese investment (affected by slower China growth and disincentives to capital outflows); and by growing African dependence on products from China.

The deal reached between the United Kingdom and the European Union in the run-up to the forthcoming BREXIT vote (June 23) on UK and Gibraltar membership in the EU includes some references to the UK not abandoning the pound to adopt the Euro. The UK already had the right to not join the Euro – the agreement adds language to emphasize that, because of this, the UK is not to be treated as a 2nd class member of the EU. Excerpts from the EU text of the arrangement with the UK are as follows: “Recalling in particular that the United Kingdom has already been entitled under the Treaties…not to adopt the euro and therefore to keep the British pound sterling as its currency (Protocol No 15: “Unless the United Kingdom notifies the Council that it intends to adopt the euro, it shall be under no obligation to do so”)… In order to fulfil the Treaties' objective to establish an economic and monetary union whose currency is the euro, further deepening is needed. Measures, the purpose of which is to further deepen the economic and monetary union, will be voluntary for Member States whose currency is not the euro and will be open to their participation wherever feasible…Discrimination between natural or legal persons based on the official currency of the Member State, or, as the case may be, the currency that has legal tender in the Member State, where they are established is prohibited. Any difference of treatment must be based on objective reasons.

The G20 communique from the meetings, held in Shanghai (China), included the following statement: “We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.” Prior to the G-20 meetings, there was pressure from the OECD for more economic stimulus, which had a mixed reception from G-20 Finance Ministers. The OECD initiative, Going for Growth 2016, noted that “Today’s exceptionally low interest rates improve governments’ fiscal space, affording a unique opportunity to make investments in infrastructure that will boost demand, stoke growth and actually improve public finances…Choosing the right projects, combined with structural reforms, will generate higher multipliers on economic activity. This can re-launch growth while lowering the debt-to-GDP ratio, opening additional space for policies aimed at creating a more inclusive society." A quick reminder of who the G20 members are:
North America: Canada, Mexico, United States;
South America: Argentina, Brazil;
Europe: European Union, France, Germany, Italy, Turkey, United Kingdom;
Africa: South Africa;
Middle East: Saudi Arabia;
Asia: China, Japan, South Korea, India, Indonesia;
Multinational: the International Monetary Fund and the World Bank.

The structure of the new Venezuelan currency regime for the bolivar fuerte, announced on Feb 17/16 (to go into effect on Feb 18), eliminates the middle currency, moving from a three exchange rate to a two exchange rate regime. The first rate, the official rate (CENCOEX), for paying for essentials imports like food and medicine, moves from 6.3/US$ to 10/US$, the first such movement since early 2013. The second exchange rate (SICAD 2), for the import of raw materials and industrial inputs, and which had been at 13.5/US$ for some time but with limited availability, is being eliminated. Products in this group will generally come under the third rate. The third rate, the free market rate (SIMADI) for the bolivar fuerte, is currently at around 200/US$. Other changes were also announced, including a boost in gasoline prices (e.g., 95-octane gasoline to move from .097 bolivars/liter to 6 bolivars/liter). It should be added that, whatever the judgements being offered on Venezuelan economic policies, Venezuela is just one of many developing countries which are heavily dependent on oil exports, and which have had little room to maneuver in terms of policy response, due to a narrow base of exports and imports.

The Indonesia Big Bang on restrictions for foreign investment into Indonesia: more sectors have been removed from the Indonesia Negative Investment List (in Indonesian: Daftar Negatif Investasi), which lists sectors that are either fully or partially closed to foreign investment. At the same time, protection has been increased in some other sectors. The announced intent is to boost both domestic and foreign direct investment, while at the same time protecting sectors which have many small and medium-sized enterprises, and local cooperatives. There is a lot of context to these changes. For example, they are among many packages of other measures which have been announced by Indonesia since the middle of 2015. One theme is combining incentives for foreign investment with export restrictions intended to encourage more refinement of Indonesia products before export, moving higher up the value chain. Another theme is putting Inonesia openness to foreign investment so that it is more comparable with other Southeast Asia countries, such as Vietnam

March 16, 2016 update

The European Central Bank announced new stimulus measures on March 10, including lower official interest rates, as well as the first purchases of investment-grade corporate bonds as part of its Quantitative Easing program, and increased lending to banks (TLTRO II) to help stimulate lending. The Euro did not go down against the US dollar in the days after the announcement, likely a disappointment to many. But WCO notes that many currencies have been going up against the US$ in the last month, so a fair assessment of the currency impact of the new EC measures will require more analysis, looking at Euro movements against currencies around the world, some of which are linked to the Euro, and not just in the first few days, on the understanding that many smaller currencies are less liquid and take longer to react.

In Argentina, multiple exchange rates are pretty close to being eliminated, with the peso at around 15.5/US$. Argentina has what are probably the highest interest rates in the world, due mostly to its inflation rate (around 30% per year), but also due, in part, to official moves to prevent the peso, freely-traded since December 2015, from going lower. Currently winding its way through United States courts is the move in January, by the new Argentina government, to regain access to international capital markets, by offering to pay nearly US$10 billion to the “holdout” creditors (characterised by some Argentina politicians as the “vultures”) who refused to accept discounted payments on Argentina debt which went into default in 2002. (Argentina foreign exchange reserves are currently around US$25 bn). The former Argentina government also wanted to settle, but refused to make payments to the holdout funds different than to other creditors (linked to the “pari passu” clause in sovereign debt instruments). Among the next moves will be the withdrawal of an injunction in US courts which is preventing Argentina from making interest payments to other creditors, but a positive ruling on this (February 22) has been blocked by an appeal, which will not be settled before April at the earliest.

On March 14, 2016, the Central Bank of Egypt, in its own words, “decided to adopt a more flexible exchange rate regime that better reflects the underlying forces of supply and demand and, in turn, lead to greater transparency and foreign exchange liquidity through attracting greater investments and the correction of asset prices.” The result of the March 15 Central Bank of Egypt foreign exchange auction rate for the pound was 8.85/US$, a 13% change from the former rate of about 7.82/$U$S. The CBE is holding a special auction of US$1.5 billion today (March 16), which will give another reading of the level of the pound.

March 29, 2016 update

World Currency Observer is digesting a new International Monetary Fund report, The Adequacy of the Global Financial Safety Net, which was released yesterday. The IMF press release notes that the net is comprised of international reserves, central bank swap arrangements, regional financing arrangements, IMF resources (complemented by other multilateral and bilateral development partners), and market-based instruments.

WCO is making a small adjustment in the notation on the chart at the top of the page, published monthly, which compares 52 week highs and lows for indexes of selected currencies and commodities. The adjustment highlights that the chart shows the indexes of currency values based on the number of units of currency per US$. For example, Japanese yen per US$ is shown as Japan/1US$ in the above table (and as Japan/US$ in previous tables). Foreign exchange traders are more likely to express this currency pair, Japanese yen per US dollar, as USD/JPY or as USDJPY (US$ the "base" currency and the yen the "quote" currency).

(World Currency Observer will next be updated on April 6, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).)