Do recent foreign exchange gyrations spell the end of the world as we know it? Or are they just business as usual? We took a look using our FX Tool. For most countries the changes are normal, but the Eurozone, the U.S., India, Pakistan, Colombia, Russia, Ukraine, and many smaller countries now experience once in a generation gyrations.
We took the real exchange rates (inflation-adjusted) from the Canback FX Tool. The tool also allows the U.S. dollar to move, so all changes are relative to a global currency we call Ki (that is, the USD moves as well).*
We calculate exchange rate change between April 1, 2015 and the 2014 average. We then compare this with the volatility of the currency as measured in our post “The Risk of Nations – Currency”. In other words, how does the recent change compare to the standard deviation of the exchange rate. A change larger than 2 standard deviations happens to correspond to a once in a generation event (1 in 22 years).
The graph below shows the results. 50 countries meet the criteria (Eurozone countries + 28 others). They make up 53% of the world economy.
What does this mean? Since it is such a rare occurrence, we doubt that decision makers in the affected countries know how to handle the situation:
- Finance ministers and central bankers probably feel the strain in currency reserves, interest rate changes, import-export imbalances, and inflationary pressure. In the short term, exports will boom for those with weakening currencies, but medium term there will be negative repercussions.
- Local companies will not know how to handle the situation, because they have not seen it before. If their value chain is domestic, they will be affected by changes in the macro environment and especially the cost of capital. If they are exporting and importing, they will find it hard to manage the differential opportunities and threats.
- International companies will find it is easiest to parry the currency movements. They have probably seen the same thing happen recently in another country, and can bring this experience to bear on the current situation.
Note the countries not on the list. There is a lot of discussion about Nigeria and Ghana, South Africa, and Brazil. From the currency perspective though, it looks like business as usual for these countries.
The table below includes all countries.
* A more traditional FX model where currencies are analyzed against the USD gives similar results.