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December currency review

Although the gain was only 1% in December, the South African rand has risen 10% against the euro in the last three months overall (and 7% in the last six - see first table below). Given the country's deep economic recession in 2020, it does seem surprising that one of the world's most battered currencies in recent years should have done so well lately.

There are several reasons why it has done so: the unexpectedly strong resurgence of Chinese demand for South Africa's raw materials; high prices for its gold exports; excellent harvests and buoyant food sales abroad; and attractively high interest rates (to arrest the previous slump in the rand and contain inflation), which have turned the current-account deficit into a surplus. 

However, another driver of the rand's recent success is the fact that investors can finally see an end to the Covid-19 crisis, because of the rollout of vaccines across much of the world. After several months of nervous caution, during which emerging-market currencies weakened almost across the board, market participants seem prepared at last to take bigger risks with their money, moving funds out of 'safe-haven' rich countries and into developing economies.

Will the positive trend last? It probably will for emerging markets in general, assuming there are no big setbacks with Covid-19 containment. However, South Africa may soon reverse course again. As things settle down and investors shift focus from the coronavirus crisis, they may quickly realise that South Africa's long-term problems, such as corruption, weak power generation, inadequate education and infrastructure, labour disputes, and widespread poverty and inequality, all of which have seriously weakened the rand in recent years, have not gone away (despite President Ramaphosa's efforts). And with South Africa being the epicentre of a new, more contagious Covid strain, the next downturn in the rand's fortunes may have already begun.

Selected currency movements (v EUR)
Country Currency code % movement to 1 January 2021 v EUR since: Latest official annual inflation (%)
    30/11/20
(1 month)
28/9/20
(3 months)
29/6/20
(6 months)
30/12/19
(12 months)
 
Argentina ARS -7 -15 -25 -35 35.8
Australia AUD +2 +4 +3 +1 0.7
Brazil BRL 0 +2 -5 -29 4.3
Canada CAD 0 0 -1 -7 1
Chile CLP +5 +5 +5 -4 2.7
China CNY -2 0 0 -2 -0.5
Egypt EGP -3 -5 -6 -8 5.7
India INR -1 -4 -6 -11 6.9
Indonesia IDR -2 +1 -7 -9 1.6
Japan JPY -2 -3 -5 -3 -1
Kenya KES -2 -6 -10 -15 5.3
Korea Republic KRW -1 +3 +2 -3 0.6
Mexico MXN -2 +6 +5 -12 3.3
Nigeria NGN -2 -5 -7 -12 15.5
Norway NOK +1 +6 +4 -6 0.7
Philippines PHP -2 -4 -5 -4 3.3
Poland PLN -2 0 -2 -7 3
Russia RUB 0 0 -14 -24 4.4
Singapore SGD -1 -1 -3 -7 -0.1
South Africa ZAR +1 +10 +7 -12 3.3
Sweden SEK +1 +5 +4 +4 0.2
Switzerland CHF 0 0 -2 +1 -0.7
Turkey TRY +3 -2 -13 -26 14.6
United Kingdom GBP 0 +2 +1 -5 0.3
United States of America USD -2 -5 -8 -9 1.2
Venezuela VES 0 -50 -75 -94 1813.1

The Iraqi dinar was the biggest faller in December, following its devaluation (see next table). Other big losses, for the Haitian gourde and Liberian dollar, were mainly due to market corrections after recent strength, while the Algerian dinar, the Armenian dram and the Ethiopian birr all suffered because of local conflicts or social unrest. Unlike South Africa, Argentina has as yet failed to arrest its currency's long slide.

Countries experiencing largest currency losses in December

Country

Currency code Movement v EUR
30 Nov 2020 - 1 Jan 2021 (%)
Inflation
(%)
Algeria DZD -5 2.7
Argentina ARS -7 35.8
Armenia AMD -8 1.6
Ethiopia ETB -6 19.0
Guinea GNF -5 11.0
Haiti HTG -11 21.6
Iraq IQD -22 0.7
Liberia LRD -7 13.1

Cuba went ahead with its currency reform on 1 January, unifying its multiple exchange rates. However, the changes scrapped one currency, the convertible peso (CUC) completely (although CUC will remain in circulation until June 2021), while leaving the other, the Cuban peso (CUP) unchanged in value, so what is effectively a massive devaluation doesn't show up in the table above.

Libya is also reported to have instituted its pre-announced exchange-rate reform as scheduled on 3 January, so that will show up in next month's table.

In other news, the US Treasury has labelled both Switzerland and Vietnam as 'currency manipulators', meaning it suspects them of deliberately engineering lower currency rates than fair market value to boost export competitveness. The move brings no practical measures, but may encourage the relevant central banks to ease up a little on market interference, allowing the Swiss franc and Vietnamese dong to appreciate a little faster, but don't expect anything dramatic!

Finally, here is our table showing the biggest gains this month against the euro, which continues to be robust. The Chilean peso was the world's strongest currency, rising in parallel with copper prices (its biggest export) and as Chile's political situation stabilises.

Countries experiencing largest currency gains in December

Country

Currency code Movement v EUR
30 Nov 2020 - 1 Jan 2021 (%)
Inflation
(%)
Chile CLP +5 2.7
Colombia COP +3 1.5
Turkey TRY +3 14.6
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