Identifying a theme
Looking back it seems that there was, after all, a theme to the last week’s exchange rate movements: by and large the allegedly “risky” commodity-related and emerging market currencies prospered while the safe-havens were left by the wayside. The biggest loser was that safest of safe havens, the Japanese yen, which was down by -0.7%. The winners were the South African rand and the Canadian dollar, both of which rose by 1.5%.
But that apparently cut-and-dried picture was not always apparent along the way. On more than a couple of days currencies moved up or down for no obvious reason only to retrace their steps with equally little justification.
Sterling was a case in point, putting in the weakest performance on two days and coming close to the leaders on two others. Overall the pound weakened by an average of -0.5% against the other dozen most actively-traded currencies.
To be sure, the UK economic data did sterling no great favours, especially the unexpected declines for manufacturing and industrial production in October. However, the bigger driver – in both directions – was the evolving debate about who can press the Brexit button and what will be the result. In essence, the quicker and dirtier Britain’s departure from the EU looks as though it will be, the less positive investors are about the pound (and vice versa). This situation will run and run.
No tapering, oh no Sir
Three years ago the US Federal Reserve said it would begin to “taper” the scale of its money-printing effort, reducing the amount month by month. The reaction of financial markets was to panic-sell bonds. Since then the word “taper” has been erased from the central bank lexicon. So when the European Central Bank said last week that it would extend its asset-purchase programme until the end of next year at a pace of €60bn a month instead of the current €80bn president Mario Draghi was emphatic that This Is Not Tapering.
Investors took him at his word: it was an extension of QE, not tapering. So they sold the euro, which lost one and a quarter US cents on the week and fell two thirds of a cent against sterling.
The opposite of money-printing
A month ago India’s government cancelled the biggest banknotes in circulation – 500 and 1000 rupees – but failed to ensure that sufficient new notes were ready to replace them. The sudden disappearance of 86% of the country’s cash was supposed to hurt tax-avoiders and crooks but has instead dealt the economy a punishing blow because most people rely on cash for their daily business.
The good news
Apparently without monitoring the results in India, Venezuela’s Nicolas Maduro this week pulled a similar stunt “to strike against the mafia”, cancelling the 100 bolivar banknote ahead of the planned introduction of higher denominations. It has closed the border to prevent villains smuggling their notes into the country from Colombia to use them before they expire worthless.
The bad news
Venezuela’s central bank quotes a beautifully precise sterling exchange rate of 12.5415675 bolivars to £1. The real rate on the street, where people can actually sell bolivars for foreign currency, is more like 5000 to the pound. That puts a 100 bolivar note at £0.02 – tuppence – and even that value is rapidly being eroded by hyperinflation that doubles prices every 18 days. Anyone sitting on a stack of the notes would have lost their money anyway.
Sarah, Senior Account Manager at Moneycorp
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