World Currency Observer
Exchange rates around the world

WCO staff have completed a one month-long research visit to the United Kingdom - see November 25 update below. Cheers.

October 1, 2014 (see October 15 and November 25 updates below. Next update: December 2. Visit Search to look at past issues of World Currency Observer (brochure edition).)

Exchange Rates: one year high and low

The Euro is down 7% against the dollar from this time last year. The Japanese yen is down 11% (with much more movement than most other Pacific Rim currencies). The Brazil real is down nearly 5% on the month. The UK pound is down 2% on the month against the US$, but is up against the Euro nearly 7% since this time last year. The Turkish lira is down over 5% on the month against the US%, and by nearly 13% since this time last year. The Russian rouble is down 7% on the month against the US$. The Israel shekel is down more than 3% on the month against the US$, and by 3.7% since this time last year.

International carbon pricing: Clarification is needed to understand the role that exchange rates will play with regard to the announcement, on September 23, of a strengthened multinational commitment (under the umbrella of the United Nations Climate Summit) to put a price on carbon (dioxide) emissions. The thrust of these efforts is not to determine an internationally accepted world price for carbon emissions, which could be used in any country - this would be based on the cost to the world of an additional unit of carbon emissions. The intention, rather is to put a price on carbon, i.e. to make carbon emissions costly to firms and individuals, so as to provide incentives to limit carbon emissions. Carbon pricing, in this sense, can be achieved by a number of instruments which are widely used, which include: restrictions on carbon emissions (usually with a safety-valve emissions trading scheme) or carbon taxes (the end user pays a $/unit-of-carbon tax which represents the carbon dioxide emissions embedded in a product or service). Assessment of carbon prices is complicated by the fact that governments usually reduce other taxes to offset carbon price payments. Another variation, part of the UN commitment last week, is that firms are being asked to commit to setting their own internal carbon price at any price they want, as long as they they feel the price will be high enough so that it materially affects any investment decisions they may make which helps them reduce greenhouse gas emissions.

International tax inversions and tax havens: The OECD released comprehensive recommendations for a co-ordinated international approach to combatting tax avoidance by multinational enterprises, under the OECD/G20 Base Erosion and Profit Shifting Project. G20 Finance Ministers have identified tax base erosion and shifting of profits to lower tax countries as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. The OECD noted that its recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment. It also noted that globalisation has offered multinational enterprises ever-increasing opportunities to reduce their taxes, often by moving profits to offshore financial centres.

October 15, 2014 update

The European Commission, moving ahead with implementation of the European Union Fuel Quality Directive, is dropping a proposal which would have singled out crude oil from Canada’s oil sands (an important Canadian export), and assigned it a greenhouse gas emissions factor of 107, versus a factor of 84.5 for conventional oil. This would have been an almost insurmountable barrier for Canadian oil sands-based crude oil exports to Europe. A press release from the EU noted that "…any potential increase in the volume of high carbon intensity crudes (such as oil sands)… would need to be met by proportional efforts to lower emissions in other areas. This could be achieved through the use of sustainable biofuels and electricity, or for instance, by reducing GHG emissions during fossil fuel extraction. " Canadian exports to the EU of oil sands-related products are next to zero right now, but are expected to grow substantially over the next few years.

WCO remarks that, given recent events in Hong Kong, it would have been surprising if there had not been a noticeable, but very small, downward spike (on the order of 0.2%) of the Hong Kong dollar around the time of the October 1 demonstrations (China’s National Day). WCO remarks that the 30 year-old Hong Kong currency peg still looks very strong, supported by a currency board which targets the Hong Kong dollar at around 7.8/US$., and which has (according to its last announcement) US$ reserve assets which are more than seven times the value of Hong Kong dollar currency in circulation, and around half of HK$ M3 (the broadest measure of money in most economies). It is also interesting to draw a parallel between: Hong Kong; with another strong currency board, the Macau pataca; and with the large US dollar reserves held by the People’s Republic of China.

November 25, 2014 update

With regard to the world-wide foreign exchange rate “scandal” (see WCO’s previous observations), which centers on the Reuters 4:00 p.m. fix but also on other fixes: the United Kingdom Financial Conduct Authority, in announcing fines totalling more than Ł1.1 billion on five banks for “failing to control business practices in their G10 spot foreign exchange trading operations”, also provided some examples of how the transactions worked. To look at one of the examples: a major bank, which had committed to the conversion of Euro 474 million to US dollars for a client at the US$/Euro rate to prevail at a particular ECB 1:15 pm fixing, made the conversion in a series of transactions (over 10 minutes or so) at lower US$/Euro rates which were, nonetheless, higher than the going offer rates, which had the effect of progressively pushing up the exchange rate, so that it reached a peak at the 1:15 pm fixing (1315), and at a level which was no doubt higher than it would have been without the transactions. The profit on the 10 minutes or so that this illegal transaction took to complete was just under $100,000, based on a miniscule rise in the exchange rate (less than 1/10 of a percent). As has been the case so often in media reports on the foreign exchange benchmark lawsuits, additional color was provided by excerpts from traders’ e-mails before and after the transactions, including the few minutes earlier in the day when traders organised the fix (e.g.: “u should be nice and clear to mangle”...“22 the rate”...“always was gonna be”...“can’t teach that”).

Hungary is to complete, by early 2015, the years-long difficult process of converting over a million consumer mortgages from their original foreign currency denominations (generally Swiss francs but also Euros) into the Hungarian currency (the forint). There are suggestions that the November 7 forint exchange rates will be used to make the conversion (256.47/Swiss franc, 308.97/Euro), but there are other difficult issues which are being resolved. Among these are what interest rates to use in the new contracts, complicated by the fact that the choice of foreign currency denominated loans by borrowers in the 2004-08 period was originally made to take advantage of low Swiss and Europe interest rates, ignoring the fact that these low rates could imply offsetting declines of the forint against the Swiss franc/Euro and thus higher payments for consumers, which is essentially what happened. Another issue is that Hungarian banks had matched the mortgages loans with offsetting Swiss franc/Euro liabilities, and steps are being taken to manage the forthcoming foreign exchange exposure.

(WCO staff have returned from a one month-long research visit to the United Kingdom. World Currency Observer will next be updated on December 2, 2014. Visit Search to look at past issues of World Currency Observer (brochure edition).)