How The United States Has Backed Commodity Exporters Into A Corner

The central banks of global commodity exporters are caught between a rock and a hard place. Canada is one of the world's foremost producers of oil and natural gas, and South Africa ships precious metals, diamonds and ore to markets across the map. Both have been hit by a downswing in commodity prices, but the two countries have been pursuing starkly different monetary policies.

On July 14, Canada's central bank cut interest rates by 25 bps for the second time this year, while pegging down growth forecasts. The decision came in an attempt to promote investment and consumption as soft energy markets crippled the country's economy.

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South Africa, however, moved in the opposite direction: Reserve Bank Governor Lesetja Kganyago boosted borrowing costs, largely to protect against capital flight, which is expected to plague emerging markets once the Fed raises rates in the United States.

The contrast between Canada and South Africa is a microcosm of what's quietly happening throughout the world, as commodity exporters are being backed into a corner by a rebounding American economy. The strengthening U.S. dollar has pushed down prices of USD-denominated products from gold to cattle, incentivizing monetary easing to combat GDP contraction. Meanwhile, the prospect of non-zero interest rates in the United States for the first time in over six years has many of the same nations thinking about tightening their own currencies to stay competitive among investors.

Exporters Hurting

New Zealand, which relies on milk, meat and butter for a combined 30 percent of total exports, posted its first monthly-trade deficit of 2015 in June and the widest annual deficit in six years, according to a Credit Suisse report published Friday. The country's reserve bank lowered interest rates for the second consecutive month on Thursday – this time to 3 percent – citing a softened economic outlook as the primary rationale.

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Reserve Bank of Australia Governor Glenn Stevens, who has already lowered rates twice this year, said at a charity event on Wednesday that further cuts remain on the table." But, he cautioned, too much expansion could lead to dangerous risk-taking and excessive borrowing.

Fari Hamzei, founder of Hamzei Analytics, proposed to Benzinga that the decline in gold could be partially due to central banks selling off their reserves in efforts to devalue their currencies. He noted that Germany recalled gold reserves today that were being stored in the U.S. Fed's vaults in New York.

James Lord, executive director of Morgan Stanley's Global Emerging Markets division, noted in a report published Thursday that "several of [his] bearish year-end targets for EM currencies are being hit faster than expected," reflecting a strengthening dollar and corresponding low commodity prices.

"Central banks in commodity-exporting countries do want to cut if the fundamentals permit, but not everyone has that flexibility," David Hensley, director of global economics for JPMorgan Chase & Co. in New York, told Bloomberg. "In the emerging markets there's just not much room."

When these countries look to "defend their currencies" against an eventual rate hike by the Fed, National Investor Editor Chris Temple said to Benzinga, "they're really screwed."

Brazil, like South Africa, has hiked interest rates repeatedly in 2015 even as commodity prices have declined, hoping to evade the issue Temple highlighted. Borrowing costs in South America's largest economy are currently at over 13 percent. As a consequence, the Brazilian economy has stagnated.

According to Temple, the Fed "has at least one eye" on the dilemma that the U.S. has created for many of its trading partners. For Janet Yellen and Company, it is becoming increasingly clear that any discussion of when to raise rates in the United States must consider monetary policy outside American borders.

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