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Exchange rates: October moves

ECA International

When Global Mobility teams use a build-up or balance-sheet system to calculate and review international assignees' remuneration packages, the interplay of exchange rate movements and inflation usually makes their lives easier by ensuring that the majority of cost of living adjustments required are moderate. This is because very often high inflation in the host location, which has an upward impact on the cost of living index, is at least partly caused by depreciation of the host currency, which has a downward impact on the index. The two main factors (exchange rates and inflation) therefore more-often-than-not offset each other to some degree.

However, situations sometimes arise where the two main cost of living factors, instead of countering each other, combine to pull in the same direction. When this happens, for instance when high inflation occurs alongside an appreciating host currency, the effect on the cost of living index can be much more considerable.

The first table below shows four such potentially difficult situations: Brazil, Liberia, Mozambique and Surinam, all of which saw significant currency gains in October while also recording high inflation. However, in order for indices to be heavily affected, both factors need to have been potent for most of the period since the last index was calculated and/or pay was reviewed. In the cases of Liberia, Mozambique and Surinam, regular readers of this blog will quickly realise that October's exchange rate gains run counter to recent more durable trends which have seen all three currencies fall heavily in value. So in these three cases, any cost of living calculation which takes at least several months into account will be moderated by the offsetting influence of a depreciating host currency (despite October's moderations) countering high inflation. The situation with Brazil, however, could be much more challenging.

As the final table below shows, the Brazilian real has gained 12% against the euro in the last six months and 19% in the last 12, largely because the more market-friendly policies of the new president compare favourably in investors' eyes to those of the previous incumbent, now impeached. At the same time, however, the country continues to suffer from elevated inflation despite the stronger currency pushing import costs down. This is somewhat unusual and has come about because, although previous currency losses were at least partly to blame for rising prices in Brazil, the latter were also caused by a complex web of other factors, mostly affecting supply chains, many of which continue to prevent inflation from falling much (although it is now declining a little).

ECA will publish its September 2016 Cost of Living Survey in November and Brazil is likely to see a considerable rise as a host location in the indices as a result of the scenario highlighted above. Such situations, with both cost of living factors pulling in the same direction, are fairly rare, but they are worth looking out for if you want to avoid surprises as you work to protect your international assignees' purchasing power.

Countries experiencing largest currency gains in October
Country
Currency code Movement v EUR
3 - 31 Oct 2016 (%)
Inflation
(%)
Brazil BRL +5 8.5
Liberia LRD +5 8.4
Mexico MXN +6 3.0
Mozambique MZN +5 24.9
Surinam SRD +12 63.9
Tonga TOP +5 -1.4

While reviewing pay of assignees posted to Brazil might be tricky at present, it could be more so if the staff come from the United Kingdom. Cost of living factors there are the mirror opposite of those in Brazil. The UK has had a persistently weak currency in recent months because of the Brexit vote (the pound has lost a quarter of its value against the real in the last six months and fell 8% in October alone). The exchange rate factor has barely been offset to any degree by inflation, which is extremely low. Although British inflation is now rising because the fall in the pound is lifting import prices, as yet it remains too low to counter the powerful effect on cost of living indices resulting from currency losses. This situation will affect all assignments from the UK, of course, but those to Brazil could see very significant index changes indeed, as pairs of opposing forces pull the cost of living calculation wide apart.

The reverse effects experienced with assignments from Brazil to the UK could be equally challenging to manage. If you need assistance with any of these issues, please get in touch with us at ECA.

Countries experiencing largest currency losses in October
Country
Currency code Movement v EUR
3 - 31 Oct 2016 (%)
Inflation
(%)
DR Congo CDF -7 6.0
Gibraltar GIP -4 0.5
Sweden SEK -3 0.9
United Kingdom GBP -4 1.0

In other exchange rate news, China's currency, the yuan renminbi, this month became the fifth to be included in the International Monetary Fund's Special Drawing Rights basket of currencies. Beijing has been lobbying for such international acceptance as a reward for the steps it has taken to liberalise its exchange rate regulations. The move should allow it to take further measures, which, given China's economic slowdown, may result in greater yuan depreciation, at least in the short term.

Egypt remains the world's most likely candidate for the next official currency devaluation, after the IMF again called for greater flexibility to be adopted with regard to the country's exchange rate regime, as part of conditions it hopes to set before it finalises further funding.

The weakest currency in the world in October, as the table above shows, was the Congolese franc of the Democratic Republic of Congo. The reasons behind its weakness are political, with President Joseph Kabila due to end his final term in office on 19 December but appearing to be taking steps to hold on to power in violation of the constitution. Investors, and no doubt the people of DR Congo, fear a slide into crisis.

Finally, here is this month's selected currency movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 31 October 2016 v EUR since: Latest official annual inflation (%)
    3/10/16
(1 month)
1/8/16
(3 months)
2/5/16
(6 months)
2/11/15
(12 months)
 
Argentina ARS +4 +1 -2 -58 40.5
Australia AUD +2 +2 +4 +7 1.3
Brazil BRL +5 +5 +12 +19 8.5
Canada CAD +1 0 -2 -1 1.3
Chile CLP +4 +3 +6 +6 3.1
China CNY +1 0 0 -6 1.9
Egypt EGP +3 +2 +4 -10 14.1
India INR +2 +2 +4 -1 4.3
Indonesia IDR +2 +2 +5 +5 3.1
Japan JPY -1 0 +6 +14 -0.5
Kenya KES +2 +2 +4 +1 6.3
Korea Republic KRW -1 -1 +4 +1 1.2
Mexico MXN +6 +2 -5 -13 3
Nigeria NGN +2 +2 -53 -57 19.5
Norway NOK 0 +5 +2 +4 3.6
Philippines PHP +2 -1 +1 -3 2.3
Poland PLN -1 +1 +1 -1 -0.5
Russia RUB +3 +7 +7 +3 6.4
Singapore SGD 0 -2 +1 +1 -0.2
South Africa ZAR +3 +3 +7 +1 6.1
Sweden SEK -3 -3 -8 -5 0.9
Switzerland CHF 0 0 +1 0 -0.2
Turkey TRY -1 -2 -6 -6 7.3
United Kingdom GBP -4 -7 -15 -25 2
United States of America USD +3 +2 +4 +1 1.5
Venezuela VEF +3 0 -67 -67 582.5

 

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