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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

October 5, 2016. (See October 19, 2016 update below). Next update: November 2, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Japan yen was up nearly 3% in September against the US dollar, and up 15% since this time last year. Also showing similar strength was the Indonesia rupiah (where a tax amnesty has had a strong impact, as measured by assets moved back to Indonesia, and tax and penalty payments). A broad range of Asian countries were stronger or else held their own on the month against the US dollar, so that the China yuan fell against most Asia currencies. Three exceptions to the upward movement of Asian currencies: the Philippines peso was down 4% on the month against the US$, the Myanmar kyat was down 3.4% on the month, and the Mongolia togrug moved down again this month. The Euro was up a little on the month against the US$. The Mexico peso was down 4% in September, and down 15% since a year ago against the US$. (There is some talk that instances of weakness in the Mexico peso are linked to moments of better performance by candidate Trump in polls for the US presidential election). The Chile peso was up over 2% in September, and by more than 6% since this time last year against the US$. The UK pound fell by over 2% on the month against the US$, and is down by nearly 17% since this time last year. The Turkey lira was down around 15% on the month (the state of emergency, in effect since the July coup attempt, will be extended until the middle of January 2017). A broad range of former USSR currencies rose on the month (the major exception was Georgia), with the Russia rouble up over 3%. The Israel shekel is up nearly 5% since this time last year. The South Africa rand is up nearly 2% on the month, with the Botswana pula and Rwanda franc up around 2.5%. There has been a steep fall of nearly 18% on the month by the South Sudan pound. The oil producing countries in OPEC are working hard to try and achieve world oil production limits, which would put upward pressure on world oil prices.

The perception is growing that future deals removing barriers to trade and investment between countries will be harder to achieve (referred to by some as a reaction against globalisation). There have been anti-trade statements by Presidential candidates in the US, and the BREXIT vote to take the United Kingdom out of the European Union. Even more significant have been the mass demonstrations throughout Germany against EU trade deals being negotiated with Canada and the United State-Germany being the EU country that has benefited the most from the expansion of global trade (including the activities of Deutsche Bank in global financial markets). But it would take a very strong political push to reverse the globalisation that has already take place. Many provisions of trade agreements have been incorporated into country legislation, and are thus enforceable within the legal system of countries, not just in extra-territorial trade dispute processes. Tariffs on the cross-country trade of goods and services are at historic lows. And the machinery and processes of trade disputes and remedies continues to operate, one example being the trade case against China launched during the summer at the World Trade Organisation by the United States, alleging export restrictions on nearly a dozen key industrial commodities.

There are media reports (originating with Reuters) suggesting that countries in the Visegrad group (Czech Republic, Hungary, Poland and the Slovak Republic) will veto any post-BREXIT agreement between the European Union and the United Kingdom which does not guarantee access of their citizens to the United Kingdom. If the United Kingdom were to be granted equivalent access for its citizens to the European Union, this would enormously lighten the risks to EU-UK relations after the BREXIT withdrawal of the UK from the EU. (UK Prime Minister May has just indicated the process will begin by March 2017).

A recent International Monetary Fund staff paper, How to Adjust to a Large Fall in Commodity Prices, focuses on adjustments by government budgets (spending and taxation) to falls in resource-related revenues, which are generally based on the sale of commodities, priced in US dollars, to worldwide markets. One suggested precaution to avoid problems (generally not followed) is to have in place a well-designed tax system, with tax collections from non-resource sectors, and sufficient profit taxation in resource sectors. Part of this is to have in-place a mature tax system which collects revenue from many sources, such as a value added tax on the sale of goods and services. With regard to exchange rate regimes, the IMF paper puts the spotlight on Chile (1982-88 response to a worldwide fall in copper prices) and Nigeria (1981-2 drop in world oil prices). Chile, in particular, had large amounts of external debt denominated in foreign currencies, which had accumulated when commodity prices were high. So when Chile devalued (a consequence of moving from fixed to flexible exchange rates), there was a big increase in the cost of debt servicing. (WCO notes that dozens of countries around the world have been in this situation over the last 40 years or so, with foreign currency debt providing a strong incentive to avoid exchange rate devaluations). The IMF paper mentions several examples of countries (Algeria, Kazakhstan, Oman, Saudi Arabia) expected to transition, over the next few years, if insufficient adjustments are made, from net creditors to large net debtors. Countries singled out as able to ride out the current oil shock, due to large sovereign wealth funds (“buffers”), are Norway and the United Arab Emirates.

October 19, 2016 update

Flash crash of the pound sterling. On Thursday October 6, when it was nearly midnight in the United Kingdom, after UK and US markets had closed for the day, the pound sterling, over a period of less than five minutes, fell, in Asian markets, by nearly 6% (from US$1.26/pound to around US$1.18/pound, which was below the important psychological level of 1.20/pound, and then recovered to around 1.245). The flash crash of sterling was characterised by many as an electronic glitch driven by computer-generated trades (programmed to buy or sell when misalignments of currencies are detected within the context of prices and interest rates, creating profit opportunities). But, some ask, was the October 6-7 sterling flash crash instead a moment of market clarity, a "vision" of what is going to happen to sterling over the next few weeks? Because sterling has continued to fall in October, now down more than 5% since the beginning of October, currently at around US$1.23/pound, although not (yet?) down as far as it was on the night of the flash crash. The international nature of the flash crash, and the fact that banks are the dominant big players in foreign exchange trading, means that it is understandable that the Bank for International Settlements is the multilateral body which has been asked to examine what, precisely, caused the crash.

With the news that the United States has ended thirty years of economic sanctions against Myanmar (also called Burma in the USA), effective October 7, 2016, WCO made some notes on the structure of US sanctions on Myanmar, and on the history of their imposition and tightening, and then their easing and removal. [Some geopolitical facts about Myanmar: a population of 53 million, with a 2200 km seacoast on the Bay of Bengal, and bordered on the land side by Bangladesh, India, China, Laos and Thailand. The Myanmar currency, the kyat ("royal peacock"), has floated since April 2012, prior to which there was, for many years, an official rate in the 6/US$ range, along with a black market rate in the 1000/US$ range. The kyat is currently at around 1270/US$, a little weaker than on the day the end to sanctions was announced.] Sanctions on US investment in Myanmar were first imposed in May 1997 by US Presidential Executive Order. More extensive sanctions were imposed on July 28, 2003, when the US Congress passed a law which included a ban on the importation into the United States of products of Burma, and a ban on the provision of financial services to Myanmar (Burmese Freedon and Democracy Act of 2003). At the same time, United States anti-money laundering provisions against Myanmar were put in place, including limits on correspondent relations with Myanmar financial institutions. There were also in effect special sanctions related to Myanmar jade and rubies, and sanctions on designated companies and individuals connected to the Myanmar military junta, which formally lost power in March 2011. US sanctions were first eased in July 2012. In August 2013, when the 2003 Act was not renewed, virtually all of the previously-imposed bans on the importation of Myanmar goods into the US, and on investment were, effectively, allowed to lapse. In September 2016, along with an announcement that remaining sanctions would soon be lifted, the US added Burma to the list of countries in the US Generalised System of Preferences, a list which exempts certain countries from high import taxes. As noted above, remaining sanctions were lifted on October 7, 2016.

(World Currency Observer will next be updated on November 2, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).)