Currency to Torpedoes

Posted February 04, 2009

Currency and politics mix as the Kazakhstan tenge weakens against the dollar and the Russian ruble devaluation is blamed. The euro weakened to a 2-month low against the US dollar and the yen for a couple of reasons.


Politics and currency certainly do mix…often.  It’s true around the world as evidenced by the recent weakening of the Kazakhstan tenge against the US dollar to 149 tenge per dollar.  But here is where politics and currency rates become intimate partners.

Kazakhstan has been bolstering its currency using its currency reserves.  To date the reserve account has been drained of $6 billion.  This is similar to what is going on in Russia as the ruble devaluates.  A neighbour of Kazakhstan is Kyrgyzstan which has been severely impacted by the Kazakhstan recession.  Kyrgyzstan is seeking international aid as a result.

This is where the story gets very interesting.  Russia has offered to give Kyrgyzstan financial assistance in exchange for gaining control of a torpedo plant.  It seems this particular torpedo plant supplies the Russian navy.  This is not the only deal Russia is trying to make either.  Russia has offered Tajikistan, Turkmenistan, and Uzbekistan financial deals in order to gain control of gas supplies and other commodities.

What is really interesting about this situation is the fact the Russian ruble is threatening to weaken more than the trading band allowed against the trading basket.  The lower trading band is now set at 41 rubles against the basket and the Russian currency continues to test the floor.  The ruble has fallen 34% since August 2008.  Despite the troublesome weakening, The Russian Bank Rossii is lending to banks that are speculating on the currency.  This means the speculative pressure on the ruble is being driven by the Bank Rossii itself.

The ruble fell to 36.3431 against the dollar yesterday.

Politics, currency and finance….it’s a sure combination that spells uncertainty.

In the Euro-Zone, the euro is weakening against the US dollar and the yen because Eastern Europe economic troubles could deepen the Euro-Zone recession.  The trade deficits are increasing and as countries like Russia devalue their currencies, the Euro-Zone predicts more financial troubles. 

The euro weakened to $1.2827 against the US dollar.  It also weakened to 114.56 yen per euro. 

New Zealand offered a bit of good news for investors.  The country’s unemployment figures were better than expected.  The New Zealand dollar strengthened to $.5112 US dollars.  It also strengthened to 45.66 yen. 

The Australian dollar also strengthened against the US dollar and yen, because indices indicate commodity exports may increase due to higher demand.  The Aussie rose to US$.6428 and 57.41 yen.

In Mexico, there is a very different currency picture.  Mexico’s peso has been  rapidly weakening against the US dollar.  Banco de Mexico is buying pesos in the foreign exchange market in an attempt to provide some currency stability.  The currency intervention is just the latest drive to stop the peso slide and $16.6 billion in currency reserves has been spent. 

As a result of the latest purchase of $400 million of pesos, the peso rose against the US dollar to 14.4396 pesos per dollar.  Unlike Russia, the Mexican central bank is not trying to establish a currency range or floor.  Mexico is simply trying to make sure the peso does not weaken too rapidly to a point of no-return in terms of economic consequences.

Russia, on the other hand is trying to prevent ruble devaluation below a level set by the Bank Rossii.

There is a lot of currency intervention beginning to occur which is just a sign of the times.   The need to adjust trading bands, lower interest rates, and control currency devaluations is just proof there is still a lot of uncertainty in the market.