Currency movements are the major players in monetary policy now

One of the features of these economic times is the way that we get so many denials that monetary policy is pretty much impotent. We of course know what to do with official denials. But whether you choose interest-rates or longer-term yields via QE ( Quantitative Easing) there is now the obvious issue that 8 years or so of what have been extreme moves have not produced the “escape velocity” of Bank of England Governor Mark Carney. However movements in exchange-rates have retained quite a bit of power albeit that there is always an element of robbing Peter to pay Paul about them. What I mean by this is that a currency rises or falls against another one which means that overall it is a zero sum game with the losers matching the winners. Or at least at the first stage it is as in our increasingly centrally planned world all movements seem to cause trouble. But as ever we see much going on in the currency markets.


For those unaware something I have mentioned in the past took place at the beginning of this month which was this. From the International Monetary Fund.

The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound.

This does have real effects as for example some countries are likely to use it as a benchmark for foreign exchange reserve holdings. So we may see more demand for the Renminbi and we may have seen the biggest shift of all which is the SDR of the IMF increasing in importance. From Bloomberg at the beginning of September

The World Bank issued 500 million SDR units ($698 million) of three-year notes in China’s interbank market this week, the first sale of debt in the International Monetary Fund’s alternative reserve assets since the 1980s.

So we see that the US Dollar is facing potential challenges from both the Chinese Renminbi and the SDR of the IMF. Although care is needed with the latter as one bond issue will not cause sleepless nights!

However we did get a flicker of response as the other currencies in the SDR basket needed to be reduced to let the Renminbi in and they ( Euro, Yen and £) were except for the US Dollar which was nearly unchanged ( 41.9% to 41.73% compared to 37.4% to 30.73% for the Euro).


However rather than strength we saw this today according to Reuters.

The currency fell after the People’s Bank of China set the midpoint CNY=PBOCat 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

Just for comparison it has dropped from 6.33 to the US Dollar a year ago. Meanwhile it now buys 15.4 Yen rather than the 19 of a year ago which will focus attention in Tokyo.

The official view admits only a minor depreciation.

On August 31, 2016, the CFETS RMB exchange rate index closed at 94.33, losing 1.06 percent from the end of July;

It is now 94.07.

The Euro and the Yen

These are places where expansionary monetary policy was designed to reduce the value of the respective currencies albeit that one was explicit (Yen) and the other implicit (Euro). However more recently both have seen their currencies go through stronger phases in spite of both negative interest-rates and large-scale QE programs.

Overnight they have been echoing each other.

BOJ’s Kuroda: BOJ may delay hitting inflation target to 2018 ( @DailyFXTeamMember )

Draghi: Euro zone inflation could approach the ECB’s target by late 2018 or early 2019 ( Reuters)

Actually if you look at the surge in the value of the Japanese Yen in 2016 then it is it which is the furthest away from getting anywhere near its inflation target. But in the debates over possible reductions in unconventional monetary policy or “tapers” seem moot in comparison to this reality. Accordingly both will being trying to have lower currencies except after inflation success we saw one rebound strongly and the other stop falling a rebound a little.

Saudi Riyal

It gets only a small amount of attention but there are more than a few signs of stress in the financial system of Saudi Arabia right now. The issue of the lower oil price is clearly the main game in town but its effects have been added to by this. From the Saudi Arabian Monetary Authority on the 12th of August.

With regard to media news about the riyal exchange rate policy, SAMA Governor would like to reiterate SAMA’s commitment to maintain the current riyal exchange rate at SAR3.75 per USD, and that bets on the riyal on futures market are based on incorrect information.

So a fixed exchange-rate to the US Dollar with all the inflexibility that it provides which includes a currency which has appreciated at a time of economic difficulty. Not the type of “masterly inaction” so beloved of the apocryphal civil servant Sir Humphrey Appleby. We see an exchange-rate which is too high combined with speculation against the currency creating uncertainty.

Nigerian Naira

This years heavy faller in exchange-rate terms has been Nigeria where I note that in late July Bloomberg noted that it had passed 300 to the US Dollar for the first time in late July. Let is now skip to Bloomberg’s report from Friday.

with the central bank holding the naira in a tight range around 315 per dollar since the beginning of August.

So not much change? Er no.

Most local businesses and Nigerians going abroad can’t get foreign-exchange from their banks and have to turn to the BDCs, which have more leeway in setting prices, and black-market street-traders openly plying their services across the country. They sell each dollar for around 475 naira, compared with 425 in mid-September.

Oh so in reality quite a lot of change then. Two exchange-rates at the same time lead to an economy signing along with Earth Wind & Fire.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

On a wholesale level it is possible to get foreign exchange from the Central Bank of Nigeria except it then wants to know where you got the money from.

UK Pound

I have covered the details of this on more than a few ocassions but merely to say that the UK Pound £ has joined the ranks of the currency depreciators in 2016 with an obvious acceleration post the EU leave vote. Let me add that if you change your money up at an airport it will feel like the UK has two exchange-rates as well.


There is much to consider in what were some 6 years ago labelled “currency wars” by the then Finance Minster of Brazil. Of course its fortunes have turned downwards since then as we note how things can turn. There are big economic impacts from currency moves as we observe the later effects on both growth and inflation.

There is also the issue of yet another central planning failure as markets which increasingly only exist to front-run central banks get less liquid and this now seems to also apply to the previously relatively highly liquid currency markets. The Financial Times has these examples today.

The biggest flash crash of recent times was in January last year with “frankenshock” — when the Swiss franc jumped nearly 40 per cent against the euro and the dollar.

The New Zealand dollar lost more than 2 cents against the US dollar amid last August’s market turmoil over China growth fears. The South African rand fell 9 per cent against the US dollar in a mere 15 minutes in January this year.

To that we can add the UK Pound flashcrash of Friday morning. However the Financial Times sadly cannot resist its party line by publishing a quote that there were no buyers of Sterling at all. Yet it is now as I type this some 6 cents higher than the low. Did it just levitate?






20 thoughts on “Currency movements are the major players in monetary policy now

  1. Hi Shaun, I was in the Post Office on Friday and saw a Euro selling rate of 1.04 to the pound. It made me gulp for my return aurf trip to Biarritz in November, maybe sterling will rally by then…. or it might be just menu du jour and cheese bread and wine…probably not so bad.
    Paul C.

    • Hi Paul C

      There used to be a Post Office Bureau de Change on the Kings Road in Chelsea which I passed a fair bit as I commuted to work and noticed the extraordinary rates and spreads. I know places have to make a living but some of the spreads quoted are pretty much usury.

  2. The currency exchange picture also shows the incredible spreads on all sorts of currencies.
    I laugh every time I see “commission free”, but then I suspect that lots of people think that this is a good deal and don’t really understand the monstrous spreads.

    • In Canada I think the buy-sell spreads are a little more reasonable for the most frequently traded currencies than what Shaun shows, although the airport outlets always offer less favourable spreads. I remember however the last time I came back from Russia in 2004 the rate I was offered on rubles I wanted to exchange was so disgracefully low, I ended up just giving the money to my lawyer, who was travelling to Russia the same year.

  3. the currency issues we have now are the direct result of a certain BoE wonker called


    seem clown mania isn’t just for the country folks , we have one in central London (!)

    the speculators are out and wanting another rate cut when the solution is a rate rise…..

    guess what we’ll get


    • It seems to have escaped your attention Forbin that the pound collapsed 8.5% on 24 June, that would be the day after the Brexit result was announced, it continued it’s collapse until 27 June by which time it had fallen some 11% against the US dollar. First and foremost the UK pound collapse is down to uncertainty caused by Brexit, secondly Carney has made the situation worse with an ill timed rate cut.

      If he cuts further the pound will fall further. The longer May delays commencement of Brexit negotiations the further will fall the pound as uncertainty mounts creating more fear amongst investors which then becomes contagious.

      • aye , but all the noises are to stoke inflation up – the cut did that to some extent ( I with Shaun , the people will not benefit
        from inflation they want)

        and I really do feel Carney will cut again and boost QE if he can.

        the market is testing the strenght of will of the BoE and UK Government – seems to be a re-run of ERM times….

        except we’re cutting and not raising rates in a panic….

        interesting times


      • I’m not sure Carney thinks it was ill-timed, Noo 2. I think he knew exactly what he was doing. He couldn’t have chosen a better time to have the maximum effect from a 0.25% cut. I guess he will do it again if the opportunity arises. And when inflation does start to rise he will be slow to raise the bank rate. Very slow.
        Carney (like Donald Trump) is busy proving there’s no such thing as “rock bottom”.

  4. Hi Shaun
    I can recommend TransferWise to cut out the spread, with the caveat you need bank accounts on both sides of the transfer.
    Your final comment re the FT resonates. Its almost impossible these days to read anything written by anyone in the MSM or increasingly generally on the web that you don’t need to interpret through the filter of some political viewpoint. Not just economics and not just obviously but almost any topic is used to have a subliminal influence. This trend does not increase the knowledge, rather it diminishes participation as the reader tries to reduce the impact of propaganda.
    Thank goodness for sites such as yours!
    I just despair when I look around the world at the few characters putting themselves forward for public office against the forces of the global elite. Surely they don’t all have to be so crass? Sometimes I wonder if its a ‘cunning plan’ to make us all fall into the welcoming arms of the centralists.

    • Hi JW

      Thank you. Let me add to the public service issue by saying that there are usually some much more competitive prices near to Victoria station for holiday use.

      Actually I was reading about someone who was what you are looking for as I was reading the bit about Teg in Heretics of Dune last night. He finds that planet Gammu ( Giede Prime) has been taken over by extreme wealth and those in charge think of the ordinary people as “muck”. Sound familiar?

      The FT had its problems before but the takeover by the Nikkei organisation seems to have made things worse.

  5. Great blog as always, Shaun.
    When discussing currency wars, please don’t ignore Canada’s most prominent currency warrior, Bank of Canada Governor Stephen Poloz. From May 2013, the last month before he took over as Governor from Calamity Carney, to September 2016, the Canadian dollar effective exchange rate index, measuring the value of the loonie against a trade-weighted average of other currencies, has declined by 19.2%. The most recent month past, September, was just a typical month in Polozland, with the loonie falling against the currencies of almost all our trading partners, including the UK, and only the usually reliable Mexicans allowing the loonie to appreciate against their peso. The CERI for September was down 0.7% over the month, although it is fair to say that it was up 1.4% as compared to the previous October.
    Before being appointed governor he was the head of Export Development Canada (EDC). So there is reason to suspect he was chosen for the job over the favoured candidate, Deputy Governor Tiff Macklem, because the Canadian government wanted a currency warrior in the top job and he had the resumé for it.
    When Poloz announced the first of two cuts in the overnight rate in January 2015 he denied that Canada was engaged in a currency war with the United States. The interest rate announcement for that rate drop actually invoked the adverse impact of the oil price drop on underlying inflation as a reason for the rate cut, although the most recent CPI update showed the annual rate of core inflation (CPIX) for November 2014 was 2.1%, above the 2.0% target rate. It had actually been above 2.0% since August, so doing something that would push it up even farther above target (as it did, it was at 2.4% by March 2015) made no sense in terms of keeping underlying inflation under control.
    This seems to be why Poloz seems bent on replacing the obviously superior CPIX measure of underlying inflation with the inferior common component of CPI measure as the Bank’s operational guide with the renewal of the inflation control agreement later this year. It was showing an inflation rate of 1.6% in 2014Q3 when the CPIX was showing underlying inflation above target. It will not always show a lower inflation rate than the CPIX (in 2009Q2, the last quarter of the 2008-09 recession in Canada, it actually showed an inflation rate of 2.7% as opposed to 1.9% for the CPIX!) but he is almost certainly right in thinking that as he continues to drive down the loonie the common component of CPI measure is less likely to embarrass him with above target inflation rates than the CPIX measure.

    • Hi Andrew and thank you.

      Your points made me look up the trade-weighted numbers for the Loonie calculated by the Bank of England. It averaged 112.1 in May 2013 and and 89 in September this year. I also remember a phase where people were looking at the price of vegetables over there including if I remember rightly the humble cauliflower.

      Actually the nadir was 82.7 this January so we are seeing a commodity currency in many ways and should the current rally in some commodity prices such as crude oil continue then the rate cuts will turn out to have been ill advised.

  6. “There is also the issue of yet another central planning failure as markets which increasingly only exist to front-run central banks get less liquid”

    Couldn’t agree more Shaun and I’m one of those investors doing the front running mainly in Euro denominated Corporates. Made 13% so far and I think theres further to go although following the Brexit debacle it’s turned into more of a currency play for me. Do I agree with it? No but then again if I see a way to make money well…….

    Next threat to the pound is the inflation numbers out next week, I expect them to have risen again,Oh dear the pound could be in for another battering.

    • Hi Noo2

      Markets tend to retest lows so another US $1.18 is quite possible in this phase. As to the inflation numbers we are reaching the phase when I pointed out earlier in the year that the numbers would start of rise and of course as we look forwards we do so with both a lower UK Pound and a higher oil price.

      As to the front-running I am pleased you are doing well but such things are damaging markets..

      • Yes, I suggested last December that if the BOE didn’t hike that month it was too late and inflation would become baked in. As you’ve demonstrated here in previous months, service sector inflation is quite high, which, when combined with the falling commodity prices effect beginning to fall out of the numbers and being compounded by a small commodity price increase alongside a collapsing pound it’s beginning to look like CPI = 3% and RPI = 4% next Summer/Autumn.

        On damaging markets I agree and the answer is with the CB’s – stop issuing forward guidance and go back to the shadows making your moves surreptitiously, otherwise investors like me will continue taking advantage simply because it’s easy money.

        I do wonder sometimes if Al Qaeda have changed tactics in their quest for the destruction of the West by infiltrating the Establishment and making the appropriate moves to destroy the economy and financial system .

  7. Whereas most countries are desperate for their currencies to depreciate, to help trade,increase exports and inflation (which is good for us), we have achieved it and now it’s the end of the UK!
    So how does that work?

    • I’m not sure it’s the end as exports and domestically made products will benefit in the short term as UK export goods become cheaper while imports become more expensive, forcing the domestic population to substitute domestically produced products for their preferred imported foreign ones. Of course, for those products the UK has no substitute for the populace will have to grin, pay the extra and bear it.

      Long term this is not a good place to be especially as inflation picks up due to the weak pound but wage rises have decoupled from inflation.

  8. Another great post Shaun.

    There are some “experts” out there who state that sterling still has some way to go, and also that this is a good thing.

    “The pound has depreciated by about 15 per cent since Brexit, and has another 5, possibly 10, per cent go to before it stabilises at around $1.1 dollars per pound.” ( from an article in the independent by a Mr Ashoka Mody, Visiting Professor of International Economic Policy at Princeton University and former deputy director of the International Monetary Fund’s European and Research Departments). He seems to believe that 1.1 USD per GBP is fair value and that the balance of payments deficit will somehow vanish if this is achieved.

    I also saw Danny Blanchflower mention that the MPC can always devalue sterling to get the economy going, that’s even after the massive depreciation.

    When I read the views of “experts” like these it always reminds me of the following definition:

    An “ex” is a has-been and a “spurt” is a little drip under pressure.

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