July currency review

Zimbabwe ditched use of the US dollar and other foreign currencies last month, and reinstituted the historically-tainted Zimbabwean dollar. At the same time, the authorities vowed to stop printing money and allow the official exchange rate to be determined by market forces.

Many were quick to criticise the reform, worried about the Zimbabwean dollar's association with the world's highest-ever-recorded hyperinflation a decade ago. Initial results appear to support their concerns, as Zimbabwe's currency has continued to slide and inflation has leapt to an alarming 175.7% (see first table below). Social unrest is getting worse as the cost of living soars, and the government's latest announcement, that it is suspending publication of annual inflation figures for the next six months, makes it look like it's trying to hide the truth. Indeed, the ruling Zanu-PF party has a long record of doing just that.

However, the authorities do appear to be honouring their two main promises, of not printing excessive money and allowing the Zimbabwean dollar to float reasonably freely. The official exchange rate (latest USD 1 / ZWL 9.3) has depreciated to roughly the same degree as street rates (latest ZWL 10.6) and the gap between the two, which narrowed considerably following the reform, has barely widened.

As long as these policies continue, the currency is likely to settle at fair value, allowing businesses to price goods and services properly and consumers and investors to be more certain they're getting value for money. If the government can also make other reforms to stimulate the economy, there is a chance of better times ahead.

Furthermore, the inflation statistics suspension is not just a wheeze to hide the extent of the hopefully short-term pain the country is going through; there is a reasonable technical reason behind it. Let's hope that by the end of the six months, when the new data series is launched, the resulting annual inflation figures will be significantly lower.

The euro had its weakest month for a while, mainly as the Brexit saga continues to concern investors and as the European Central Bank looks to monetary easing to stimulate economic growth in the Eurozone. Most currencies gained ground against it in July. Here are the biggest climbers:

Brexit is hitting the British pound even harder, of course, as the UK's new prime minister, Boris Johnson, tries to sound increasingly serious about accepting a (potentially disastrous) no-deal Brexit if it comes to it. If he doesn't change course, or have a different course forced upon him by the British Parliament, expect more currency losses. And if a no-deal Brexit were to come about, expect a serious slump.

In other currency-related news, Croatia has applied to join ERM2, which is a sort of waiting room for those hoping to eventually join the Eurozone. Current plans are to join ERM2 in mid-2020 and adopt the euro in 2023.

Meanwhile, the Ecowas group of 15 West African states has announced plans to launch its own single-currency union next year. It is very unlikely all will be able to move that soon, but a few pioneers may be able to forge ahead while others join later.

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