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World Currency Observer

Exchange Rates: one year high and low

May 4, 2016 (see May 18 update below). Next update: June 1, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).

April was a month of worldwide weakness of the United States dollar, with the major exceptions being selected African currencies. The Euro and the yen were up against the US$ during April – the April movement in the Euro has been reflected in similar April movements by most Western and Eastern European currencies, including the United Kingdom pound. The Euro is now around 5% stronger against the US$ than this time last year, while the yen is up more than 10% against the US$. The United Kingdom pound is down 4% against the US$ since this time last year, which translates into an approximate 9% drop against the Euro since then (there has, of course, been a lot of interpretation of recent movements of the UK pound, focusing on the impact of the upcoming BREXIT vote, in June, on UK membership in the European Union). Almost all South America currencies were up against the US$ in April. In particular, the Brazil real was up about 7% in April (in the face of reported strong intervention by the central bank to moderate the rise), but the real is also down more than 16% since this time last year against the US$; the Argentina peso was up more than than 8% in April against the US$ (as noted in WCO last month, Argentina has just completed a large US$ bond issue, the first in 15 years.) The Russia rouble is up more than 14% against the US$ in April, and up by around 12% against the Euro. In Africa, the Algeria dinar, the Angola kwanza, the Burundi franc, the Mauritania ouguiya, the Mozambique metical and (especially) the South Sudan pound were all down against the US$ in April. Among these countries, Burundi stands out because of its internal conflict and fears of economic collapse. The South Sudan pound fell by almost 50% in April, as it struggles to find equilibrium since the decision to float the pound on December 14, 2015, and to cope with world oil prices. The Papua New Guinea kina was down slightly in April against the US$ (PNG is looking for World Bank assistance to overcome the effects of the oil price collapse), while other Asian currencies were stronger in April against the US$.

Bitcoin May 2016

The person who is generally recognised as the creator, back in 2009, of Bitcoin electronic money, has announced his identity to worldwide media. The number of bitcoins (BTC) has grown since then to around 15.5 million, with a reported projected peak of around 21 million, to be reached in the year 2140. At the current exchange rate of US$450 per bitcoin, the total value of all bitcoins in circulation is around US$ 7 billion–it was 13/1$US when it was first introduced, and the growth and the fluctuation of the bitcoin/US$ exchange rate over the years have been the source of much interesting analysis. Also, from the moment of creation of each individual bitcoin, each time a bitcoin is spent, it is “attached” to a block chain of computer code, which summarises all of the previous transactions made with that particular coin. Besides eliminating the possibility of counterfeiting, this means that the velocity of the bitcoin money supply can (in principle) be precisely estimated, along with a descriptions of each stage of the expenditure chain for each coin.

There has been some question whether, in reaction to oil price weakness over the last two years, Middle East oil countries would devalue their currencies (which are generally fixed against the US$, and which have been for many years.) Saudi Arabia would have been the likely leader–if it moved the riyal, other countries would have followed. But, Saudi Arabia is also one of the few countries in the world with strong options, other than devaluation, to cope with the fall in world-wide oil prices, because the assets in its sovereign wealth fund (SAMA Foreign Holdings) are massive in comparison to its population. In light of this, the Vision 2030 policy document, recently released by the Kingdom, shows that some countries can take alternative steps besides devaluation, if they have the resources, to react to a fall in price and demand for their major export product. And it is interesting that even a country as rich as Saudi Arabia is feeling the need to react to the fall in oil prices by restructuring its economy. The blueprint in Vision 2030 includes: restructuring Saudi sovereign wealth fund investments through the Saudi Public Investment Fund; the development of Saudi Arabia’s considerable mineral resources; and encouraging greater growth of the small and medium-sized business sector. There are also measures which are uniquely Islamic, such as greater encouragement of Umrah visitors to Mecca and other sacred destinations, and more diligence in preserving historic Islamic sites. Also very interesting is the 14 year time frame, suggesting both the planning horizon for the measures, as well as giving an indication of the time the Kingdom feels that it has to complete the measures outlined.

May 18, 2016 update

The IMF has issued a review of exchange rate developments in two of the three groups of former-Soviet Union countries: the Caucasus countries (Armenia, Azerbaijan, Georgia) which border on Turkey, Iran and Russia; and the “stan” republics of central Asia (Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan), bordered by countries which include China, Russia and Iran. The physical barrier between these two groups of countries is the oil-rich Caspian Sea, which is contiguous to Azerbaijan, Kazakhstan, and Turkmenistan (also to Iran and Russia). The third group of former USSR countries, not covered by this IMF analysis, are Russia and the countries between Russia and the European Union. Excerpts from the review: “Since late 2014, exchange rates (ERs) and ER regimes of the[se]…countries have come under strong pressure…reflects the decline of oil and other commodity prices, weaker growth in Russia and China, depreciation of the Russian ruble, and appreciation of the U.S. dollar, to which [these] currencies have historically been linked...currencies have depreciated in nominal terms by 20–50 percent against the dollar…Azerbaijan and Turkmenistan by 20 and 25 percent against the dollar in early 2015, and Azerbaijan again (by 32 percent) in December 2015. Kazakhstan took a similar step by devaluing its currency in early 2014 by 19 percent. The Kazakh tenge has depreciated by an additional 45 percent against the dollar following adoption of a floating rate regime in August 2015. A depreciation of the Russian ruble over the period has offset changes in the values of most [of these] currencies... High dollarization has…limited monetary policy transmission mechanisms and raised financial soundness concerns…Uruguay [as it was in 2002] bears the most resemblance to [these] countries, given a high degree of dollarization, less developed local capital markets, and limited foreign exchange risk-management capacity at the time of transition…Financial dollarization in Armenia historically has been high, although it has experienced wide fluctuations (WCO note: a chart in the IMF paper suggests that Georgia, Kyrgyz Republic and Tajikistan are at Armenia-levels of dollarization.)

(World Currency Observer will next be updated on June 1, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).)