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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

November 4, 2020 (November 18 update below). Next update: December 2, 2020. Visit Search to look at past issues of World Currency Observer (brochure edition).

(Note: as of November 4 morning, the United States presidential elections were not yet finalized). Pandemic news and its economic effects continues to dominate, with the world in a second wave of Covid-19 cases. Many currencies around the world strengthened in the first three weeks of October, and then weakened in the last week to record a small net change (0.5% movement, some cases up, other cases down) against the US$. Among the currencies that fell into this category were the Euro and the United Kingdom pound (which were flat against each other for the month of October), along with most other European currencies, as well as the Canada dollar, the Australia dollar, the New Zealand dollar, the Russia rouble, the Indonesia rupiah, etc. Another group of currencies rose against the US$ over the entire month without giving back their gains in the last week among these are the Mexico peso, which was up more than 4% on the month (down 11% since this time last year). The Iceland króna fell by a little more than 2% against the US$ in October. The Haiti gourde continued its "correction", and was up against the US$ by 15% in October. The Jamaica dollar was down by 3% in October against the US$. The Brazil real fell by nearly 2.5% against the US$ in October, and the Argentina peso (official rate) was down by nearly 3%. The Chile peso was up by 1.5% in October against the US$. The Euro fell by 0.5% in October against the US$, and the Swiss franc was up by 0.5%. The Norway krone fell by 2% against the US$ in October. The Albania lek rose by a little over 1% against the US$ in October, and is up by nearly 6% since this time last year (outpacing the strength of the Euro against the US$). The Iran riyal rose by 2.5% in October against the US$. The Liberia dollar was up by nearly 4% in October against the US$, and up by nearly 10% since this time last year. The South Sudan official exchange rate is steady, but there has been a big fall in the parallel rate, to around 700, as the South Sudan government has announced a 1:1 currency exchange – Ethiopia, in the same region of northeast Africa, has just completed a similar process, said to have been intended to reduce the size of the parallel market. The South Africa rand strengthened by nearly 3% against the US$ in October. The Angola kwanza was down by 5% in October. The South Korea won moved up against the US$ by 2.5% in October, while the China yuan and the Taiwan dollar were up by 1.5%. The Australia dollar was down by 2% against the US$ in October. The Pakistan rupee rose by 3% in October against the US$ (down 3% since this time last year), and the Myanmar kyat rose by 2% (the Myanmar kyat is up by 15.5% against the US$ since this time last year). World oil prices fell by 10% in October, and are now down by nearly 40% since this time last year. North American natural gas prices continued their ascent, and rose by nearly 60% in October, so they are now 25% higher than this time last year. World rubber prices were up by nearly 20% in October. Cocoa prices were down by 15% in October.

 Euro and UK pound 2020 July to October

The focus of an IMF paper, released on Oct 19/20 (Digital Money Across Borders: Macro-Financial Implications), is a wide-ranging discussion of issues related to increased use of central bank digital currencies and global coins (which could be issued by any company which has the necessary technology, which could be subsidiaries of any type of financial institution or wireless communications firm). One of the themes in the IMF paper of interest to WCO is how such digital currencies, based on distributed ledger technology (blockchains), could emerge as alternative to bank-based remittance payments, perhaps reducing remittance costs (the 3rd alternative is physical movement of cash, which has been affected by pandemic-related border closures), but, more importantly, increasing access to receipt of remittances by people without access to bank accounts (a very high proportion in many parts of world, such as some countries in the Sub-Saharan Africa, North Africa and the Middle East), or for those to whom the cost of banking services is prohibitive (which is true in a broad range of countries around the world). There is an interesting phrase in the IMF paper: “Making a payment overseas could be just as easy as sending an email”, but a reminder of the challenges and difficulties (especially safety and security) to ever get to this state of affairs is the 3rd phase of a Work Plan issued in October 2020 by the Financial Stability Board, indicating that resolution of many of the issues involved will require the participation of many parties, and will therefore take some time.

WCO is looking at the possible impact of pandemic-related border restrictions on cross-currency interest and principal swaps (there may be some impact from another possible big border closure, a non-agreement Brexit withdrawal of the United Kingdom from the European Union). The working hypothesis is that the impact of border restrictions on cross-currency swaps should be small, partly because of the over-the-counter nature of the market (private deals, not listed on organized exchanges), with the major concerns being the design of the contracts, including provision for enforcement in case of default. The way the swap market is organized is a reminder of how deeply embedded in world financial markets is the centrality of the US dollar, with swap interest rates offered as bid and ask quotes for contracts, for a range of maturities and currencies, against floating US dollar debt priced off the LIBOR rate of interest. So, for example, a Euro to yen fixed interest rate swap between a Europe and a Japan firm, with a swap bank in the middle, is, essentially, at least four contracts. The Europe firm, after issuing fixed rate debt in Europe, transfers the fixed interest rate Euro payment obligation, and the Euro principal, to the swap bank, in return for agreeing to make floating US dollar LIBOR payments on behalf of the swap bank, and the swap bank sends the Euro interest obligation and the principal on to the Japan firm in return for the Japan firm sending a US interest payment obligation to the swap bank. The Japan firm does the above payments, in reverse and at the same time, transferring Japan yen principal and interest payment obligations to the swap bank, who passes them on to the Euro firm in the form of another contract. The result is a Euro-yen interest rate and principal swap, structured as four contracts: two yen for US$ (Euro firm/swap bank and Japan firm/swap bank) contracts, and two Euros for US$ contracts (all of these starting with debt issues by the European firm in Europe, and the Japan firm in Japan). The US$ cash flows embedded in the contracts cancel each other out, and the residual is a stream of Euro and yen payments. Two of the contracts could be cancelled out if the Europe and Japan firms contract with each other directly without the swap bank, but they would first have to find each other and then draw up the contracts – WCO’s impression is that, in most cases, the counterparties use the services of swap banks. Also, if such an agreement was structured as a straight Euro-yen swap, there would be just one contract, but the preference would be for combining a (more standard) Euro-for-Libor (US$) contract with a yen-for Libor (US$) contract, with the implied US$ payments cancelled out. Given the way the market has evolved over the last forty years, it is hard to imagine the world quickly moving away from US dollars to another currency at the floating-rate center of such transactions.

November 18, 2020 update

Covid-19 cases continue to increase in many countries, but there was news of possible vaccines in the United States, which helped lift U.S. stock markets. US election results reported by the media indicate it is certain there will be a new President in mid-January 2020.

The 16-year-old trade-in-aircraft dispute between the EU and the United States, over subsidies to Boeing (by the US) and Airbus (by the EU) continues, guided by the rulings and the rules of the World Trade Organization. A year ago, the WTO ruled that the US was permitted to retaliate against EU subsidies for manufacture of the Airbus (more particularly, subsidies by France, Germany, Spain and the United Kingdom), and could impose countermeasures (tariffs, etc.) on $7.5 billion of annual trade with the EU (imports), which the US put in place in the autumn of 2019. A year later, in October 2020, the WTO ruled on the other half of the dispute, that the US had given illegal subsidies to Boeing, harming the EU, and that the EU was entitled to impose retaliatory countermeasures on US$ 4 billion of trade with the EU, and the EU has put these in place (including, for the moment, the United Kingdom, since the UK Brexit break from the EU will not be completed before the end of 2020). Political support in the EU for the new EU tariffs is not based on criticism of US support for Boeing, which was the reason for the WTO ruling, but rather has focused on the impact of the non-aircraft October 2019 Airbus-related US tariffs on EU sales to the United States. The impact of the additional tariffs (ranging from 15% to 25%) on around $11.5bn of EU-US trade (EU-US trade is around US$1100 billion per year, with US exports of around $470 billion, and EU exports of around $600 billion), is nowhere near the magnitude of the China-US dispute, which involved, at its peak, new higher tariffs on most of the US$650 billion in China-US trade (China is the largest supplier of imports to the US). Moreover, while the timeline of the EU-US dispute has followed WTO rulings, the China-US moves against each other have been more direct, although both China and the US made moves to get WTO support for their moves, with the WTO ruling, on September 20, that the US had not sufficiently justified its China tariffs - the US says it will appeal this ruling, even though US has made moves which mean there is currently no appellate body at the WTO. An additional part of the context of the EU-US dispute is that agreement was reached, in August 2020, on a number of EU-US tariff reductions

The Regional Comprehensive Economic Partnership agreement, which has just been signed, is structured as extending and deepening the relationships among ASEAN members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam), and with the ASEAN Free Trade Agreement partners (Australia, China, Japan, New Zealand and South Korea). It is, in some ways, a successor to the proposed Trans-Pacific Partnership, which, if it had gone through, would have included the United States but excluded China. India was supposed to be a member of the new Regional Partnership, but withdrew from talks last year.

(World Currency Observer will next be updated on December 2, 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.)