Currency Volatility Tracker

Currency Volatility Surges in 2020

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The tiny Caribbean nation of Haiti had the world's second most volatile currency in 2020 rising 25% against the dollar. Above, the Haitan gourde.

The coronavirus pandemic sent global currencies on a downward spiral not seen since the 2015 commodities crash.  "Just about every market went on a wild ride."

A year after currency markets were the calmest in a decade, currency volatility surged in 2020 to an average of 3.53 percent, an 80 percent increase from the 2019 mark of just 1.96 percent, as the result of a virus pandemic that sent many currencies to record lows against the dollar only to regain value by the end of the year, according to annual data gathered by CreditPulse, which tracks 124 global currencies.

The whirlwind of volatility created 15 currency Hot Spots or countries in which the annual currency volatility average resided in the upper tier of volatility, which in 2020 was 6.73% or higher.  Currency stability is one of the cornerstones of economic freedom, prosperity and development.  Thus, currency instability, or volatility, is a key indicator of market turbulence and risk. 

The 2020 hot spots were the countries shown in the graph below in addition to Argentina, Liberia, Norway, Australia and Russia.  In all, 19 currencies experienced volatility rates of 6% or more, the most since 26 reached that dangerous threshold in 2015, the year of the commodities crash.

By mid-March 2020, after the World Health Organization (WHO) declared a global pandemic, the value of just about every major currency fell to an all-time low against a rising dollar.  The currencies of Australia, New Zealand, Sweden, Norway, Russia all hit record lows against the greenback the week of March 20th as news of the global pandemic spread.  The British pound sterling was the equivalent of $1.16, the lowest in modern times for the once venerable currency. 

Meanwhile, the same week, the dollar rose to a value of 96.8 after starting the year at 89.57, a rise of 8.07%, according to the WSJ Dollar Index that tracks the dollar against a basket of currencies.  The dollar finished the first quarter up 5.40% while the currencies of every other country were gasping for air.  That would change later in the year, however, as the dollar finished the year at minus 5.1% and on December 18th hit its lowest mark since January 2018.

"The volatility in the commodities market, caused mainly by the collapse of crude oil prices and a steep rise in gold really sucked the air out of the currencies of commodities-based economies around the world, particularly the oil producers," said John Bassford, Senior Credit Analyst at CreditPulse.  "Thanks to the pandemic, just about every market went on a wild ride in 2020."

By the end of April, the price of West Texas Intermediate crude, the U.S. benchmark, plunged 72% for the year to $16.94 a barrel, the lowest since 1998 as Saudi Arabia and Russia, two of the world's major oil producers, were unable to agree on a plan to cut production.  Meanwhile, as the dollar reversed course and began to fall in the second quarter, the price of gold surged reaching an all-time high of $2010 an ounce on August 6th.  Gold finished the year up 24.6% after rising 19% the previous year.

The pandemic-driven volatility resulted in a clear divergence of currency values between the developed and undeveloped world as the currencies of advanced economies finished the year in positive territory against the dollar while emerging and frontier market currencies suffered.  For example, the currencies of Australia and New Zealand, two advanced commodities-based economies, finished up 9.12 and 6.75 percent respectively against the dollar while, Brazil, a leading emerging market nation finished down 29%.

Oddly enough, the currency that appreciated the most against the dollar in 2020 came from one of the world's least developed nations, Haiti.  The gourde rose 25.2% against the dollar finishing the year with a value of 72 gourde to the dollar after reaching a pandemic-low of 112.38.

The dramatic rise in Haiti's currency, extremely rare for such a poor country, was the direct result of a new law that went into effect on September 18th forcing the country's money exchanges to deal only in local currency rather than in U.S. dollars, the often preferred currency.  Three weeks later, the gourde went from a value of 105 to 64 to the dollar.

"In every country, prices are displayed in the local currency," explained Frantz Bernard Craan, president of the Haitian Chamber of Commerce and Industry, as reported in an October 2nd article in VOA.  "In Haiti, for years we have been doing business in two currencies and people thought that was normal, but eventually we had to correct that."  But, unlike most other countries, some $3.3 billion, or 37%, of Haiti's economy comes from global remittances denominated primarily in dollars. 

Brazil, South Africa and Mexico, three of the world's leading emerging market economies, could not escape the turbulence of the pandemic as their frequently-traded currencies were major hot spots in 2020.  The Brazilian real and South African rand are no strangers to volatility, but the more stable Mexican peso has become a hot spot for only the second time since 2012 with a volatility of 9.11%, well over the benchmark of 3.53%.  In 2017, the peso was also a hot spot at 5.32% after the election of Donald Trump who had threatened tariffs against Mexico related to immigration. 

Mexico's currency fell to a value of 24.988 to the dollar on April 24th before gradually rebounding throughout the year finishing at 19.881 to the dollar.  For the year, the peso lost 5.53% of its value against the dollar just slightly worse the an the dollar itself, which lost 5.1%.  Still, the peso finished the year stronger than other major Latin American currency other than Colombia's peso, which lost just 5.09% and Chile's peso, which gained 5.18%. 

The Brazilian real was down 29% for the year but finished the year strong, along with many other emerging market currencies rising 8.61% in the fourth quarter (see previous article on Q4 currency volatility).  In fact, in the first week of November when the dollar tumbled 1.83% it was the Brazilian real that saw the biggest gain of all currencies jumping 6.6%.

The euro finished the year higher at 8.55% putting it a value of .8186 to the dollar, or $1.22 to one euro, a major improvement over the $1.13 to euro rate the previous year, but still a far cry from $1.37 rate at the end of 2013. 

The pound finished up 3.86% equal to $1.37 and the Japanese yen rose 4.84%.  China's currency, the yuan, rose 6.2% against the dollar in 2020 after declining only 1.72% in the first quarter, a quarter when most currencies plunged against a rising dollar.  The yuan trades within a closely defined trading range heavily managed and supported by the central bank.  

The most volatile year for the yuan came in 2018 when it fell 5.92% against the dollar as the result of extensive trade tariffs imposed by the Trump Administration. 

The complete CVI for 2020 with corresponding values is available upon request to clients and subscribers.
Written by John Bassford, CreditPluse