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June currency review: Zimbabwe devalues

Having seen its currency depreciate rapidly over several months, in March Zimbabwe finally lost faith with the market and fixed the value of its currency to the US dollar. We said then that there seemed little reason to think the reform would be any more successful in solving the country's economic crisis than previous measures. Sure enough, things have only worsened since, forcing the pegged exchange rate of USD 1 / ZWL 25 to be abandoned last week and the Zimbabwe dollar to be devalued by 56%.

The trouble is, the new exchange rate of USD 1 / ZWL 57 is also a fixed rate and, despite being so much devalued, is already greatly overvalued compared to the latest black-market rate of USD 1 / ZWL 90. Further divergence is inevitable. So, again, there is no reason to suspect that the reform will do anything to stop the long economic collapse. Furthermore, the government seems to be adding to people's hardships through other policies, such as banning all mobile money services, which it blames for the diverging exchange rates. Unfortunately, most consumer and business transactions are done through such e-services, because of cash shortages, so the measure is likely to cripple the economy even more. The currency devaluation has already caused a doubling of fuel prices and we can expect inflation to surge yet higher.

Countries experiencing largest currency losses in June
Currency code Movement v EUR
1 - 29 Jun 2020 (%)
Argentina ARS -4 43.4
DR Congo CDF -5 4.0
Dominican Rep DOP -5 1.1
Mexico MXN -4 2.8
Pakistan PKR -4 8.2
Venezuela VES -20 2296.6
Zimbabwe ZWL -56 785.6

Another country which has struggled to manage its own fixed-exchange-rate system over the years is Nigeria, but its recent steps to sort out the currency mess are more likely than Zimbabwe's to be successful and are already reaping rewards. Although multiple rates still apply, creating opportunities for arbitrage and corruption, the devaluation of the naira we reported in March has successfully reduced the divergence between official and unofficial rates, allowing the authorities to announce a fortnight ago a plan to fully unify all exchange rates within the next 12 months. The lesson for Zimbabwe is that fixed exchange rates are only manageable if you have enough hard currency, in Nigeria's case through its oil exports, to maintain them. Even then, as Nigeria has long discovered, they can cause serious problems for the economy.

Hong Kong's great success as a financial centre over many decades has meant it has had little trouble affording its currency peg to the US dollar. Nevertheless, debate has grown in recent years about the wisdom of prolonging the increasingly expensive policy. Furthermore, the serious divisions within Hong Kong about growing Chinese control, and the loss of freedoms which may follow the new security laws rushed through by Beijing this week, might make the territory less attractive to financial organisations, which have arguably easier options available in Shanghai and Singapore for their operations. If the uncertainty leads to an exodus, it's possible that a peg to the Chinese yuan might one day replace the current one to the Greenback.

Surinam, meanwhile, has caused itself serious difficulties by pegging its currency to the US dollar before it had sufficient oil revenues to make the fix affordable. Needless to say, a black market rapidly developed, offering fairer value than the overvalued official exchange rate, but bringing the usual imbalances in the economy and a crisis earlier this year which is yet to abate, despite a change of government. The central bank has burned through foreign currency reserves at an alarming rate, meaning a devaluation is increasingly likely. The official rate currently stands at USD 1 / SRD 7.5, but the black market is thought to offer rates close to SRD 20. Hopefully, the new government will soon be able to improve the economic situation, but in the meantime, if you need assistance managing expatriate staff in Surinam, or anywhere else, please do get in touch.

Despite several currency-regime 'fixes', which we have discussed a lot in recent months, the situation in Lebanon continues to deteriorate. The crisis is reflected by the growing divergence between the fixed official exchange rate of USD 1 / LBP 1507 and black-market rates of around LBP 7000 - the latter have fallen 40% in the last week alone, according to reports. Arguably, the fixed exchange rate has been the primary cause of the recent economic collapse because pressures resulting from it have slowly built up over many years, only to explode all at once last year. It seems it is only a matter of time before fixed exchange rates wreak their havoc. The Middle East beware...

Countries experiencing largest currency gains in June
Currency code Movement v EUR
1 - 29 Jun 2020 (%)
Georgia GEL +3 6.5
New Zealand NZD +3 2.5

As Europe begins to open up again following coronavirus lockdowns, June was a strong month for the euro. Indeed, only two currencies gained more than 2% against it, as the table above shows.

Speaking of strong currencies, the Indonesian rupiah has gained 10% overall against the euro in the last three months (see final table). This partly reflects the country's efficient response to the Covid-19 pandemic, as well as a partial rebound in oil prices, but it is also indicative of the resurgence of 'carry trades'. These trades come about when investors can borrow at very low interest rates in one country (with little chance of those rates going up, as in the US today) and invest the money at significantly higher rates in another country (preferably one with persistently moderate inflation, such as Indonesia). It may sound good for Indonesia, but in reality it threatens its prospects in a similar way to fixed exchange rates, because it tends to make the currency overvalued and unfairly uncompetitive. The US Federal Reserve's recent forward notice that its near-zero interest rates were here to stay through 2022 at least could mean many more currencies becoming targets for such carry trades.

With the United Kingdom's main interest rate at only 0.1%, it is unlikely to become a destination for carry trades. Indeed, it is struggling to find investors generally, leading to a long, steady depreciation of the pound. Analysts at Bank of America recently said that since the vote to leave the European Union the currency, long considered a safe haven during nervous times, had been behaving like an emerging-market currency in all but name. If the trend persists, the pound's exchange rates are likely to be far more volatile in the future than we have been used to. As the pound has traditionally been heavily involved in international assignments, either as the home or host currency, this could lead to bigger swings in cost of living indices to and from the UK.

Even though it was to have been more a revamp of an old currency than a new one per se, the grand announcement of the planned launch of the eco, to be used by eight countries in west Africa (Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo), caused much excitement when it was made back in December. However, since then those plans appear to have gone precisely nowhere, partly because of divisions between Francophone and Anglophone nations in the region, and there are now serious doubts about whether the project will ever materialise. We will, of course, keep an eye on this nevertheless, along with other currency issues around the world.

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

Selected currency movements (v EUR)
Country Currency code % movement to 29 June 2020 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS -4 -9 -15 -39 43.4
Australia AUD +2 +10 -2 -1 2.2
Brazil BRL -1 -8 -27 -29 1.9
Canada CAD 0 +1 -5 -3 -0.4
Chile CLP -2 +1 -9 -17 2.8
China CNY 0 -1 -2 -2 2.4
Egypt EGP -3 -4 -1 +5 4.7
India INR -1 -2 -7 -8 7.4
Indonesia IDR +1 +10 -3 0 2.2
Japan JPY -1 0 +2 +2 0.0
Kenya KES -1 -3 -6 -3 5.5
Korea Republic KRW +2 0 -4 -2 -0.3
Mexico MXN -4 +1 -18 -16 2.8
Nigeria NGN -1 -6 -8 -6 13
Norway NOK -1 +6 -9 -11 1.3
Philippines PHP 0 +1 +1 +4 2.1
Poland PLN 0 +2 -5 -5 2.9
Russia RUB +1 +10 -12 -9 3.0
Singapore SGD 0 +1 -4 -1 -0.7
South Africa ZAR +1 0 -19 -18 4.1
Sweden SEK 0 +5 0 +1 0.0
Switzerland CHF 0 0 +2 +4 -1.3
Turkey TRY -1 -8 -14 -16 11.4
United Kingdom GBP -1 -1 -6 -1 0.5
United States of America USD -1 -1 -1 +1 0.1
Venezuela VES -20 -67 -80 -98 2296.6
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