The global foreign exchange markets experienced sharp fluctuations in 2015, as market participants responded to major macroeconomic developments. They included a severe drop in oil prices, continued trouble in Greece, the latest developments in central bank policy and concerns about emerging-market economies.
This article will explore the 10 most volatile currencies of 2015 and delve into the many variables cited for causing their changes in value.
Oil prices fell 31% during 2015, adding to the decline suffered in 2014 and pushing the energy source's two-year loss to 62.4%. Because of sustained drop, oil experienced two years of consecutive losses for the first time since 1998.
The raw material incurred major losses over the last few years at a time when supply-demand fundamentals have changed quite a lot. Producers have been encountering sharp competition as U.S. production skyrocketed, rising almost 100% in the last several years. The world's largest economy is not alone in generating strong output, as both Iraq and Canada enjoy output and production that rose steadily.
The global demand for oil declined modestly, as newer vehicles require less gas per mile and both European and emerging-market nations continue to suffer lackluster economic conditions. Regardless, this slight reduction in demand did not prevent oil prices from falling substantially.
Many nations are encountering headwinds because of this bear market in the energy source, including Brazil, Venezuela, Russia, Iran, Ecuador and Nigeria. This difficulty is also being felt in the U.S., as Texas, Alaska, Louisiana, North Dakota and Oklahoma feel the impact of lower oil prices.
The Organisation of Petroleum Exporting Countries (OPEC) refused to cut output, a development that could potentially provide upward support for oil prices. Saudi Arabia was the primary advocate of the cartel, generating robust volumes in an effort to squeeze producers with higher costs out of the market.
If the global oil markets continue to have a surplus of the raw material, oil could drop to as low as US$20 per barrel, certain banks have predicted.
Central Bank Policy
Forty three banks eased their monetary policy in 2015. Central bank policy can affect forex markets in several ways. For example, these financial institutions can cut or hike benchmark rates, which places downward or upward pressure on broader interest rates. If these borrowing costs fall in one nation relative to another, it can affect exchange rates.
Alternatively, central banks can purchase bonds in an effort to jumpstart economic conditions. Taking this action can easily place downward pressure on a nation's currency relative to others. Many jurisdictions, namely the eurozone and Japan, have been experiencing sustained economic challenges and using quantitative easing in an attempt to improve business conditions.
The Federal Reserve bucked this trend when it announced a rate hike in December 2015. The financial institution revealed it would increase its target for benchmark rates to between 0.25% and 0.5%. When announcing this move, the Federal Open Market Committee revealed that it expected to slowly raise interest rates.
If the Fed continues pushing its rates higher and other central banks maintain their current easy monetary policy, it could place upward pressure on the U.S. dollar. If the greenback rises, this could place downward pressure on the value of emerging-market currencies.
Concerns About China's Economy
China showed signs of economic slowdown in 2015, reporting third-quarter GDP figures that fell short of expectations. The nation's economic output rose 6.9% during the period, lower than the 10% average growth rate enjoyed during the last three decades.
Additionally, some voiced their skepticism about the validity of growth figures. Amid these concerns, both governments and investors have been anxious about China's future growth. The worry is that this expansion could lose even more steam, and in doing so, provide the global economy with headwinds.
China Devalues Yuan
Chinese authorities devalued the nation's currency in August 2015, stating that this move would push the yuan closer to being determined by market conditions. Amid this move, the emerging-market currency experienced its largest one-day decline in two decades.
Many investors interpreted this move as a sign that Beijing attempted to spur more robust growth during a time of lackluster economic conditions. Global markets responded violently to this move, and the Shanghai stock market declined sharply in August.
Greece's Continued Turmoil
Greece experienced continued turmoil in 2015, as the nation once again bartered with European officials to avoid defaulting. Alexis Tsipras, leader of the radical Syriza party, became Greece's Prime Minister as a result of an election that took place in January 2015. After winning this contest, he pledged to return to the bargaining table with European officials in order to renegotiate Greece's international bailout. While Tsipras tried to work with the European Union to get better terms for his nation, he was unable to deliver. Tsipras later appealed to Greek voters to reject austerity measures by giving them the ability to participate in a referendum. The majority of constituents provided the vote Tsipras was looking for, but EU officials were unwilling to budge on their demands. Faced with the prospect of Greece defaulting, Tsipras agreed to the terms laid out by the EU.
While the European nation repeatedly secured bailout funding and negotiate with creditors, Greece faced structural problems. At year's end, the unemployment rate was nearly 25%, and the economy contracted 25% over the preceding five years.
Swiss Franc Cap Eliminated
The Swiss National Bank announced on Jan. 15, 2015, that it was eliminating the 1.20 floor it had set up for EUR/CHF after buying euros for more than four years in order to maintain the currency peg. The Swiss franc rose sharply because of this move to scrap the fixed exchange rate, and EUR/CHF declined roughly 30%. Following the SNB's decision, the Swiss stock market fell more than 10% and the euro dropped to as little as 0.85 francs.
Japanese Economic Weakness
Japan continued to experience economic challenges in 2015, as Asia's second-largest economy suffered several consecutive months of declining household spending and repeated failure to meet its inflation target of 2%. The Bank of Japan asserted that weak energy prices have been responsible for tepid inflation and that the nation is on track to meet its 2% target.
1) Azerbaijan Manat
Amid the aforementioned developments, the Azerbaijan manat, an emerging-market currency from a nation that was formerly part of the Soviet Union, fell nearly 50% to a 20-year low. Azerbaijan is the third-largest crude producer in the former Soviet Union, and its central bank opted to float its currency in December, dropping its former currency peg (the USD). Previously, the U.S. dollar had been pegged at 1.05 manat.
2) Kazakhstan Tenge
The Kazakhstan tenge was another casualty of falling oil prices, as sharp depreciation in this energy source coincided with forex traders abandoning the currency and instead purchasing dollars. Kazakhstan, which is the second-largest oil producing member of the former Soviet Union, opted to float its currency in August.
3) Zambian Kwacha
The Zambian kwacha fell 42% against the U.S. dollar in 2015 as copper, which accounts for 70% of the African nation's exports, dropped to a six-year low. The country faced challenges in terms of both economic growth and inflation, slashing its 2015 GDP forecast to roughly 3% in December. The month before, the Bank of Zambia increased its benchmark interest rate by 3% to 15.5% in an effort to reign in inflation.
4) Belarusian Ruble
The Belarusian ruble experienced a 41.8% drop versus the U.S. dollar in 2015, falling from 11,900 Belarusian rubles to the U.S. dollar on Jan. 1, 2015, to 18,569 on the same day in 2016. In addition to depreciating relative to the U.S. dollar, the Belarusian ruble suffered declines against all other currencies.
5) Argentine Peso
The Argentine peso had suffered a 2015 drop of roughly 35% against the U.S. dollar as of Dec. 24. President Mauricio Macri eliminated capital controls in December, prompting the emerging-market currency to experience a sharp one-day drop against the U.S. dollar.
6) Ukraine Hryvnia
Ukraine suffered sustained geopolitical conflict, and amid these difficulties, the hryvnia plunged 34% versus the U.S. dollar. During the first 10 months of the year, Ukraine's exports to Russia were 44% of their 2014 level, as the nation's businesses encountered challenges in their sales to the nation.
Ukraine's central bank harnessed stringent currency controls in April 2015 in an effort to prop up the hryvnia, and the currency traded in a range between 21 and 23 to the U.S. dollar between then and October. However, on Oct. 30, this exchange rate plunged to 23.1, a six-month low.
7) Brazilian Real
Brazil struggled with headwinds including budget woes, concerns about China's economy and high inflation. Amid these woes, the real dropped 33% against the U.S. dollar in 2015. The nation continued to face political turmoil, as there was more than one attempt to impeach President Dilma Rousseff. During these developments, two ratings agencies slashed the nation's government bonds to junk status.
8) Mozambique Metical
Mozambique, a nation in southern Africa, struggled to cope with the effects of a decline in exports of sugar, coal and cotton. Economic growth in the nation suffered because of this drop in shipments to other countries, and amid these difficulties, the metical fell 32% in 2015. Currently, the country is looking to steer its way through a cash crunch. However, there are great hopes the nation will experience robust growth once it begins producing natural gas. The International Monetary Fund stated that once this activity begins, Mozambique could enjoy growth averaging 24% between 2021 and 2015.
9) Malawian Kwacha
Southeastern African nation Malawi grappled with numerous economic challenges, including lackluster foreign direct investment, high inflation and a substantial current account deficit. Even though the country showed some signs of improvement such as shoring up its forex reserves, the kwacha fell close to 30% in 2015.
10) Somali Shilling
While few currencies managed to enjoy gains in 2015, the Somali shilling rose 15% during the year. The African nation faced challenges stemming from almost all U.S. banks ending remittance services to Somalia.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…