Also climate change in the currency markets

The link between weather and the economy is sometimes bigger than you think. Through an increase or decrease in productivity within countries, climate change can also affect the currency world, for example. Did you know, for example, that share prices rise relatively slightly more often on days when the sun is shining than when it is cloudy? 

That fact is thanks to scientists David Hirshleifer and Tyler Shumway, who some twenty years ago the weather reports next to the closing positions of the index in 26 stock markets for a total of 92.445 trading days. But the weather also affects the economy in other ways. For example, you will have noticed in the last few days that you are just a little less productive with the warm weather. The heat also puts a brake on economic growth in other ways. For example, the low water level causes problems for shipping traffic and industry.

The impact of climate change
The effect of a heat wave is hardly visible in the larger economic picture. But the picture changes if temperatures are significantly higher over longer periods than in the past. In the financial world, more and more attention is being paid to the link between climate change and the economy. For example, the British fund house Schroders calculated last year that economic productivity in India will fall by more than one percent if the average temperature on our planet rises by three degrees. In Brazil, that impact is just under one percent, while South Africa also belongs to the group of vulnerable climate countries.

Problems for rupee, real and rand?
Lower economic growth also affects the currency world. When production in a country increases, part of the extra goods and services is often sold abroad. The International Monetary Fund has already linked economic productivity to the real exchange rate in the past. In that regard, things are not looking good for the Indian rupee, Brazilian real and South African rand. The three coins already received attention in 2013, when investment bank Goldman Sachs wrote a report about the 'fragile five' (the vulnerable five). In addition to the aforementioned currencies, the Turkish lira and Indonesian rupiah were also among the group of currencies whose exchange rate could come under severe pressure.

Canadian dollar skyrockets
Incidentally, there are also countries where productivity can actually increase as a result of climate change. For example, because more land will become available for agriculture, where it is still too cold to grow anything. In Canada, for example, productivity can increase by one percent if the average temperature rises by three degrees. The Canadian dollar has already risen by more than 10% against the euro this year. However, that has nothing to do with the recent heat wave, but everything to do with the high oil price and the speed with which the Canadian central bank has raised the official interest rate by more than 2 percent this year. Just like in nature, the effects of climate change in the currency world usually only make themselves felt in the very long term.

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.