January currency review

Our two tables of biggest currency movers this month paint a contrasting picture, and not just because one shows gains and the other losses. They contrast because one keeps faith with the usual rules governing the relationship between exchange rates and inflation, while the other appears to rip them up completely.

Look at the first table below, showing that Ukraine's hryvnia and Zimbabwe's dollar were the world's weakest currencies in January. Their losses mean that for an expatriate working in either country the home currencies they are likely to be at least partly paid in would now be convertible into more host currency, giving them a cost-of-living boost. However, the high inflation figures in the right-hand column mean that price rises in their host location are probably in excess of those back home, thereby removing or reducing the exchange-rate boost to their cost of living. In short, one factor offsets the other, making maintenance of expatriate purchasing power easier.

Given the economic relationship between high inflation and weak currencies, whereby one usually helps cause the other, the first table is exactly as you would expect. That relationship also normally works in reverse, with low inflation often providing confidence in an economy and therefore a stronger currency, but look at the second table showing the currencies gaining the most in January and it is quickly obvious from the high inflation figures recorded for all five of these countries that something unusual is happening.

The reasons behind this partial breakdown in the normal cost-of-living relationship are simple enough: in a world with so many inflationary factors soaring all at once, few countries can escape significant rises in their consumer price indices, not even ones with stronger currencies. Furthermore, exchange rates are always relative, incorporating a comparison between conditions in the different countries involved, so they can never all move in the same direction as inflation figures can. 

The fact that so many countries with high inflation are also seeing significant currency gains also suggests an unusually high degree of volatility in exchange rates - a common phenomenon when the global economy is in such flux.

For global mobility teams, however, this breakdown in the relationship between inflation and exchange rates can bring extra challenges because when both cost-of-living factors are pushing so strongly upwards together, as they are for all five countries in the second table, substantial pay adjustments may be required in order to protect expatriates' spending power. On the other hand, the current volatility means that these currencies could just as easily reverse and lose their recent gains, making any hasty responses to the initial movements quickly appear rash. As always, therefore, consistent application of ECA's suggested cost-of-living adjustments over the duration of assignments remains the best policy. However, even the best-managed remuneration systems won't be able to completely avoid surprises along the way, given the sheer complexity of the global economy. 

If you need guidance on paying your international staff during these volatile times, do please get in touch.

It seems a long time since the Lebanese pound could claim to be the world's strongest currency, but arguably it was exactly that in January, gaining 37% on the black market as the central bank injected hard currencies into the system to boost the local one. Reports suggest rates on the street moved from USD1/LBP34000 to LBP21500. That it doesn't appear in our second table is due to the official currency value remaining fixed at its massively overvalued rate of USD1/LBP1507. However, not for much longer it seems, because the government has proposed to devalue the official rate to USD1/LBP20000 as part of its package of measures aiming to solve the country's economic crisis. It hasn't happened yet, but any solution will surely require a huge devaluation, so there's every chance the Lebanese pound will return to being the world's weakest currency in February.

Finally, here is this month's selected currency movements table: