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Posts tagged with: "DEXMXUS"

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Coronavirus effects on exchange rates

This FRED graph shows several exchange rates relative to the U.S. dollar. We start with the date January 6, 2020, where we set the index values equal to 100 for all these exchange rates so we can compare their relative changes since then. Through the end of February, most of these exchange rates have remained relatively stable; however, they began to increase in March. Brazil’s and Mexico’s exchange rates spiked, and their currencies have depreciated nearly 30% since the beginning of January.

In March, the COVID-19 pandemic became more severe, affecting overall economies as well as exchange rates. Reduced global demand for commodities such as oil has sent commodities prices crashing; Mexico and Brazil are major commodities-exporting countries. Canada’s and the U.K.’s exchange rates spiked at the beginning of March, but they seem to have recovered by the end of March. The euro seems to be unaffected by the global pandemic, at least compared with the U.S. dollar. China’s exchange rate, on the other hand, has remained constant despite the coronavirus originating there. Unlike the rest of the countries in our sample, which have floating exchange rates, China has a fixed exchange rate pegged to the U.S. dollar.

Large exchange rate movements can have consequences for economic growth, inflation, trade, and sovereign risk. Commodity-dependent economies and developing countries are most susceptible to this risk. It will be important to monitor the impacts of the coronavirus on international markets and economies because they will impact our interconnected, global economy.

How this graph was created: Start with a graph of any exchange rate. From the “Edit Graph” panel, use the “Add Line” tab to search for each exchange rate by its code and add it to the graph. Under “Edit Lines,” go to the dropdown box “Units” and select “Index (Scale value to 100 for chosen date).” Immediately below, under the heading “Select a date that will equal 100 for you custom index,” type in “2020-01-06.” Do this for all lines. For the euro and the pound, the original series have the U.S. dollar in the numerator, so we have to transform them to make them comparable to the other series. To do this, go to “Formula” and type 1/a and click “Apply.”

Suggested by Brian Reinhold and Yi Wen.


How a year of NAFTA news affected exchange rates

Markets overshoot in the short term

Exchange rates are among the most volatile macro series. When allowed to float, exchange rates are much more responsive to news and shocks than interest rates or the prices of goods and services. They are volatile at lower frequencies (e.g., monthly and quarterly) but especially volatile at higher frequencies (e.g., hourly, daily, or weekly). Moreover, exchange rates tend to “overshoot,” with much stronger responses to news and shocks in the short term than in the medium and long terms. This behavior, which is the opposite of Paul Samuelson’s Le Chatelier’s principle, was first formalized by Rudiger Dornbusch more than forty years ago.

A relevant example is the recent exchange rate behavior for Mexico and Canada, two of the U.S.’s main trading partners. The graph shows the daily exchange rate of the Mexican peso (left axis) and the Canadian dollar (right axis) in terms of U.S. dollars. And the three vertical lines identify three recent U.S. events: election day (Nov. 8, 2016) in green, inauguration day (Jan. 20, 2017) in purple, and the day the president announced his intention to renegotiate NAFTA (April 27, 2017) in blue.

During the recent presidential campaign, the Republican candidate clearly and ardently advocated restraining some international trade in general and terminating NAFTA specifically. However, the dominant view (both within the U.S. and worldwide) was that the Democratic candidate would win the election. The 2016 election result was a surprise for most observers and, as argued here, for investors as well. Between Tuesday, Nov. 8, and Thursday, Nov. 10, there’s a clear and significant jump in the peso-to-dollar exchange rate: from 18.435 pesos per U.S. dollar to 20.493. That’s more than 10% in just a few hours. The Canadian dollar also depreciated, but only about 1.3%, from 1.333 to 1.347. The responses of these exchange rates seem to suggest that, on Nov. 8, investors took seriously the prospect that NAFTA would be terminated or renegotiated and that such a change could reduce the value of investments in Mexico.

After the election, both exchange rates stabilized and even moved downward. However, the Mexican peso began a bumpy ride: It depreciated significantly, peaking on Jan. 20, 2017, the date the new administration took office. The peso then appreciated continuously but only until April, when the president used Twitter to announce his inclinations to terminate NAFTA. This position was reinforced by the fact that the U.S. also imposed preliminary countervailing duties on Canadian imports of softwood. Both the peso and the Canadian dollar depreciated with respect to the U.S. dollar. On April 27, 2017, the president announced his intention to renegotiate NAFTA. Eventually, both currencies appreciated.

Since September, though, both currencies have depreciated: 5% for the Canadian dollar and 9% for the Mexican peso. Two factors may be at work: a potential increase in U.S. interest rates and the news that renegotiating NAFTA has proven to be very difficult for all three countries.

How to make this graph: Search for the daily series of the Mexican peso exchange rate: DEXMXUS. From the “Edit Graph” menu, choose “Add Series” and search for the similar Canadian dollar exchange rate: DEXCAUS. From the “Format” menu, select the right axis for the Canadian exchange rate. In both series, select 3 for the line width. To create the vertical lines, open the “Add Line” tab and select “user-defined line”: Enter the date you want for both the start and end dates, and use values to fill most of the vertical space. (By the way, the exchange rates aren’t tracked on holidays or weekends, so there are some blank segments in the series.)

Suggested by Alexander Monge-Naranjo.

View on FRED, series used in this post: DEXCAUS, DEXMXUS

Election surprises and exchange rates

Some election results are expected, and some come as a surprise. As people and markets adjust their expectations for the future with this new information, some financial variables may move around quite a bit.

The graph refers to two recent elections whose actual outcomes didn’t match forecasters’ expected outcomes: the British referendum vote on whether to stay in the European Union (a.k.a. Brexit) on June 23, 2016, and the recent U.S. presidential election on November 8, 2016. The red line shows the British pound per dollar exchange rate, and the blue line shows the Mexican peso per dollar exchange rate. Each series is centered on its respective election and indexed to 100 at the date of that election. (The interruptions in the lines show when markets were closed.)

In both cases, the value of the dollar relative to these currencies appreciated around 10% from the previous day’s value. This appreciation may reflect a negative (or less positive) revision to individuals’ expectations about the future of the British and Mexican economies based on the election outcomes.

How this graph was created: From the FRED homepage, search for and select the series “Mexico/U.S. Foreign Exchange Rate.” Then use the “Add Line” feature to search for and select “U.K./U.S. Foreign Exchange Rate” and add the series in dollars per British pound. To achieve a pounds-per-dollar series, under “Edit Line,” use the customize data section and type 100/a*100 in the formula box and click “Apply.” Finally. adjust the units of both series by selecting the “Index” option in the “Units” menu. Choose a custom date of 2016-06-23 for the pound and 2016-11-08 for the peso. Select the option to display integer periods instead of dates, and set the range to be -20 to 20 for all series.

Suggested by Max Dvorkin and Hannah Shell.

View on FRED, series used in this post: DEXMXUS, DEXUSUK

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