Canadians will not escape the effects of global monetary chaos

For Canadians, the most pressing reason to think about global currencies is usually what you can buy with your dollar when visiting Mexico, Europe or the United States.

As a result, Canadians currently traveling in Britain will likely be very pleased when they check their credit card statements back home. Earlier this year, you had to pay $1.70 for one pound sterling; this week, the British currency plunged below $1.50.

This means that after factoring in this country’s runaway inflation, a pint of beer in some London establishments will set you back (just) $12. On a more positive note, a pint in a Lancashire pub with no London overhead costs less than three loonies.

But while getting travel deals can be rewarding, the eventual settlement for Canadians and their economy can still be costly. Some analysts warn that a growing wave of global exchange rate instability could actually lead to a new financial crisis quite different from the one that hit the banking sector in 2008.

If so, Canadians will not escape its effects.

And while the United States is climbing to the top of the currency pyramid right now, if history is any guide, the soaring greenback could spell trouble for the US economy down the road that financial markets don’t. have not yet taken into account.

The pound is collapsing

In a world plagued by inflation, rising rates and volatility, the pound became the poster child for monetary instability this week, a role it has played in the past, including during the « pound crisis » of the 1990s.

British Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng have come under fire from the IMF as a banker said the London bond market was approaching its ‘Lehman moment’ according to a UK financial newspaper. (Dylan Martinez/Pool/Reuters)

This time, following unforeseen measures – including a major tax cut for the wealthy – from the UK’s newest revolving door, Liz Truss, and her finance minister, Kwasi Kwarteng, even the Fund International Monetary Fund felt it had to speak out. .

« Given high inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal programs at this stage, as it is important that fiscal policy does not work against the grain of the monetary policy, » said an IMF spokesman in the kind of statement usually reserved, as one commentator told me, for developing countries.

As the currency continued to slide on Wednesday, the Bank of England struggled to calm markets and it would « begin buying government bonds at an ‘urgent pace’ to help restore ‘orderly market conditions' » , reported the BBC. A report from the Financial Times of London quoted a senior banker as saying the UK bond market was close to a « Lehman moment », a reference to the chaotic moment when the Lehman Brothers bank collapsed during the financial crisis of 2008.

Sharks spinning

Part of the problem is that while extreme currency movements are caused by genuine worries, said Jacqueline Best, a professor at the University of Ottawa who studies financial policy, they also act like blood in the water for attract currency market sharks. world: currency speculators.

« Obviously we’ve massively increased volatility right now in the currency markets, which is concerning, » Best said.

She said that normally the system of floating exchange rates between national currencies works well and allows for gradual changes in monetary values ​​as the relative strengths of economies vary.

« But their downside is that they can become very volatile and the volatility can be self-reinforcing as speculators and traders start trying to make bets on how currencies move, » Best said.

Global forex traders can contribute to volatility. Here, forex traders walk past the Korea Composite Stock Price Index (KOSPI) in a bank’s trading floor in Seoul, South Korea, in a 2020 file photo. (Kim Hong-Ji/Reuters)

Although it is countries with weaker currencies that are suffering, at the heart of the problem is the soaring US dollar, said Eric Helleiner, a political economist at the University of Waterloo who specializes in international currency and finance. He draws parallels to the 1980s, the last time the US central bank raised interest rates sharply to defeat inflation.

« When US rates go up and the US dollar goes up, that puts enormous pressure on countries that have dollar-denominated debt, » Helleiner said.

Similar to what happened during the Latin American debt crisis that began in the 1980s, known as « The Lost Decade », he said, countries and companies that have borrowed in US dollars and yet hold their collateral and obtain their income in a highly depreciated local currency the currency may face default.

A price to pay

As money flows to the safety of the US dollar, this country too could have a price to pay in the future.

« What we haven’t seen but may emerge in the more medium term is the experience of the early 1980s when the US dollar rose very rapidly, » Helleiner said. “It ultimately generated considerable protectionist sentiment.”

Indeed, foreign goods priced in cheaper foreign currencies flooded the United States, in turn pushing American manufacturers out of business.

A woman waits to buy kerosene Colombo, Sri Lanka, a country that has been one of the first victims of rising debt. Economists fear something similar could happen in other countries as US dollar-denominated payment loans become unaffordable. (Dinuka Liyanawatte/Reuters)

Karl Schamotta, chief market strategist at Corpay, which helps Canadian businesses deal with currency risk, said that while this kind of U.S. protectionism can reappear, there’s often a lag of years between changes in the value of currencies and the price of imports.

More important right now is what is sometimes referred to as the « dollar funding squeeze », where countries and companies run out of US dollars as money flows into US bonds and other safe assets denominated in US dollars.

« The United States is like a vacuum and it sucks money from the rest of the global economy and deposits it in the United States, which means less money for the rest of us, » Schamotta said. .

The US dollar against the world

He said that for relatively small open economies like Britain and Canada, where money can come out when its owners want it, the process makes money more expensive. In other words, it lowers the loonie and the cost of borrowing is even higher than it otherwise would be.

Low interest rates around the world have driven countries and businesses into debt. Now they have to pay off that debt with more expensive money. This will inevitably lead to instability in global markets, including here in Canada.

In some ways, Canada has an advantage. Due in part to the country’s commodity exports, from oil and minerals to fertilizer and food, the loonie hasn’t fallen as far against the US dollar as other global currencies. But on the other hand, Schamotta said, Canadian households and businesses are among the most indebted in the world.

Schamotta said growing fears of another global financial crisis are by no means completely over. As regulators have repaired the flaws in the banking system that led to the 2008 crisis, as global interest rates rise and global economies weaken, new forces are at work.

« It’s very, very clear that financial assets have outperformed the real economy and could fall dramatically back into line with GDP and income, » Shamotta said.


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