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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

May 4, 2020 (May 20 update below). Next update: June 3, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

The impact of the coronavirus (COVID-19) on exchange rates has more to do with how the effects are balanced among countries than with the severely negative worldwide impact, with the question being how long it will last. And the impact has more to do with the economic effect of the preventative measures (the reduction of demand and supply from the shutting down of businesses, the shift in trade patterns, the increase in government and private debt) than with the health and mortality impacts of the pandemic which, it is now becoming increasingly clear, will turn out to be less than some of the other major historical pandemics (such as the Black Plague in the 14th century, when, for example, the labor shortages resulting from the death of roughly 1/3 of the European population had major economic and political effects- in this pandemic, the labor that has been withdrawn temporarily from the work force is still available to return). Official assessments of the country-by-country impact are unevenly measured and unevenly reported by national governments. Also of importance is that each country (and regions within countries) is following a different path, particularly as it relates to the timetable toward re-opening of economic activities. (Among these is Belarus, whose decision to minimize social distancing measures has drawn much attention, but there is considerable variation among other countries in the willingness of governments to take strong measures, and the willingness of their citizens to continue to cooperate). Countries on the lower end of economic development have fewer resources to finance income replacement and health measures, although the international donor community is acting, and is placing pressure on private entities to exercise “forbearance” and to provide grants and loans. One development with a positive impact on most of the countries of the world is the enormous decline in oil prices (which began before the pandemic, and which the pandemic has reinforced), providing stimulus to energy consumers everywhere in the world (the exceptions being Gulf States and other countries whose reserves and production are large enough to massively outweigh consumption).

 Oil and Gold May 2020

Reviewing exchange rate developments in the first four months of 2020: currencies were generally drifting downward in the first part of 2020 (extending the general two year trend of a stronger US$). The realization that a worldwide pandemic was underway took hold in late February and early March, and currencies plunged dramatically against the US$. Then, around March 24, when the US was announcing its own shutdown, currencies around the world turned around, rising against the US$ until the end of March. (The price of gold has also been following this trajectory of currency movements). Since the latter part of March, currencies since then around the world have been in what appears to be a holding pattern, as the impact of the coronavirus, the shutdowns and news of partial re-openings, along with the fiscal measures, continue to be assessed (see March 2020 WCO commentaries on the difficulties of making data based analyses). Many currencies strengthened in April, taking back much of their loss from March, but, in almost every case, never enough to get back to where they were at the beginning of the year.

The Mexico peso fell by nearly 6% in April against the US$, and the Iceland króna was down by 4.5% in April (down 20% since this time last year). The Jamaica dollar was down by 5.5% in April against the US$, giving back half of its gain in March (the current value of around 141/1$US is about the same as it was in the middle of November 2019, and, then again, at the beginning of February 2020 - it is now down by 5% from its value at this time last year.) The Costa Rica colón rose against the US$ by 2.5% in April, and is up by 5.5% since this time last year. After a 6% decline against the US$ in April, the Brazil real is down by 40% against the US$ since this time last year. Except for the Argentina peso and the Venezuela bolivar (both of which are special cases), other South America currencies moved up against the US$ in April. The Euro fell slightly against the US$ in April, and the United Kingdom pound moved up, registering a half of 1% increase against the Euro. Eastern Europe currencies, with their strong trade links to the European Union, also fell slightly in March, generally more than the Euro (so these currencies fell against the Euro), with the Poland zloty and the Macedonia denar down by around 1.5% against the US$. The Russia rouble rose against the US$ by around 8.2% in April 2020, after the 20% fall in March (and the Russia rouble is considered a petro-currency - see above). The Uzbekistan som fell by nearly 6.5% in April, in a month when almost all currencies of former USSR countries rose. The South Africa rand fell by 6% against the US$ in April, and is now down by 32% since this time last year. The Zambia kwacha fell by nearly 4% in April and is down by 47% against the US$ since this time last year. The Tunisia dinar fell by 1.5% against the US$ in April, but is still up by 4% since this time last year. The Algeria dinar fell by 3.4% in April, and the Morocco dirham was up by 1.3% against the US$ in April. There was upward movement by many Asian currencies in April 2020, such as the Australian dollar, which was up 4.5% against the US$, and the Indonesia rupiah also strengthened, up by 6.5% The Pakistan rupee was up by nearly 3% in April against the US$, and the Vietnam dong was up by nearly 1.5%. The India rupee was down slightly against the US$ in April, and is down by nearly 9% since this time last year Gold prices, which have followed the trajectory of the US$ against many other world currencies, rose by a little more than 4% in April. After a tumultuous April(!), the American benchmark oil price (WTI) is below US$20 per barrel (it was above $60 at this time last year).

May 20, 2020 update

Many countries released, in the first week of May 2020, goods and (some) services export and import data for March 2020 (the month when countries were going into lockdown). They are seen as an incomplete indication of the trade effects and the currency effects from the pandemic, because the peak of the lockdown was not reached until the middle of March. (And, trade in goods has to be augmented by all trade-in-services and capital account transactions for a full assessment of the pandemic impact on currencies.) A more comprehensive indication of the pandemic impact on trade in goods will be the April 2020 trade data (to be released in early June), as April was the month of the full worldwide lockdown. After that, the May 2020 trade data (released in early July) will reflect trade developments during the period when many countries are starting to open up again. Import demand has fallen because of closures, oil price declines have reduced energy payments for importers, and cross-border tourism has disappeared. The monthly trade data figures are basically measurements of movement of goods through border customs posts, but services trade flows can be estimated from other data collected at customs, such as the number of people crossing the border (which can be used to estimate tourism services trade), and transport services payments can be estimated from the measurement of movement of goods across the border (based on the physical characteristics of the goods rather than their values). The pandemic has been reflected by continued strength of the US$ vis-à-vis other world currencies, but its movement against other currencies has not been smooth. The United States trade deficit, measured using the monthly data, has been declining since the beginning of 2019. The March 2020 measurement of a US$44.4 billion U.S. trade deficit was, however, up $4.6 billion from the US$39.8 billion trade deficit in February, a development which undoubtedly was reflected in the sharp turnaround in the US$ against other currencies in the middle of March – the US$ was going straight up until the middle of March, and then it suddenly weakened and gave back much of its gain against other currencies, and then has remained, more or less, steady since them suggesting that currency markets are still looking for solid data on the impact of the pandemic. As noted before, the impact of the pandemic on economic growth is clear (straight down into negative numbers), but the impact on two-way trade, and thus on exchange rates, is often less clear –for tourism-based and/or oil exporting or importing economies, easier to assess, but less so for other countries.

Among the countries affected by the coronavirus which are asking for financial assistance, a country which is in a class by itself is Argentina, which has three US$-denominated bond issues at default (AA21, for which a one month extension has been given) or anticipated to go into default (AA26 and AA46) on interest payments, with the crucial date being Friday May 22 -none of these bonds are at their maturity date (fecha vencimiento) this year, which could have made the projected default more severe. There are indications that the international lending community is doing what it can to ensure general agreement with its perception that, while COVID-19 has worsened the Argentina situation, the issues involved in a default by Argentina, if it occurs, pre-date the pandemic – these include a 50% decline in the US$ value of the Argentina peso (dólar banco nación) over the last year - and is not to be seen as a example for financing the needs of other countries in the next few months, many of whom are pressing for lending assistance. One such country is Nigeria, a major oil exporter for whom the financial effects of the pandemic have been made much worse by the large fall in oil prices (which, however, as of this week, looks like it might have reached a bottom).

(World Currency Observer will next be updated on June 3, 2020. 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.)