By D’Arce McMillan
If your eyes have widened at the surprise of seeing the Canadian dollar fall, think what a shock Argentines are feeling as their peso falls 20 percent.
Currencies are gyrating around the world and emerging market stock prices are falling as global investors rejig their portfolios to take advantage of what they think the U.S. Federal Reserve will do.
The U.S. central bank meets this week to determine its next step in the delicate art of manipulating the money supply to maintain the resurgence of the world’s largest economy.
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The Fed, as it is known, had for the past few years kept its trend setting interest rates ultra low. But that was not enough to stimulate enough business activity to grow the economy.
Since September 2012 the Fed also spent $85 billion a month buying U.S. bonds. In essence, it was creating money.
The program kept commercial borrowing costs even lower and weakened the U.S. dollar.
Some of that money gushing out initially found its way into commodity markets, supporting commodity prices.
But the Fed isn’t the only force in the global economy. High commodity prices spurred increased commodity production and rationed demand. China’s explosive growth of the middle of the last decade slowed as its infrastructure spending slowed and its economy matured.
Commodity prices sagged just as the United States’ economy began to gain traction. Investors, still benefiting from that gusher of money coming from the Fed, shifted to stock markets, helping to fuel the amazing run up in U.S. stock market prices in 2013.
Some of that money also found its way into emerging markets in South America, Asia and Africa.
But late last year the Fed decided that the American economy and employment picture were showing enough strength that it could start to trim its stimulus.
In December it said it would cut its stimulus to $75 billion a month beginning this month. Now there is an expectation that it will trim the amount by another $10 billion.
This tapering of the stimulus is lifting U.S. interest rates and making the U.S. buck more attractive. It is happening at the same time that there is unrest in several countries, including Egypt, Thailand and Ukraine.
Investors are pulling money from the currency and markets of emerging markets.
There are several implications for Canadian farmers.
Just as a falling loonie makes it more expensive to buy American made equipment, a weaker currency in emerging countries such as India or Turkey makes it more expensive for them to buy grain priced in U.S. currency.
That can hurt demand for crops such as pulses.
Argentina’s peso has been slammed particularly hard as the government gave up defending its currency.
Argentine farmers stopped selling soybeans. Because the soybeans have a value in U.S. dollars they maintain their worth but if they sell, their payment in pesos will be devalued as the currency sinks.
It is hard to know how this will play out.
There is always a risk of contagion, with a panic sweeping through emerging markets creating the kind of disruptions seen in the currency crises of the 1990s that hit Mexico, Asia and Russia.
Lessons learned during those crises have lessened the risk of contagion.
However, the situation could cause enough of a drag on global growth that it could, ironically, depress the very growth in the U.S. that the Fed is addressing in its stimulus trimming.
