The concerns about China and other developing economies that are 2014’s major theme so far came back to haunt foreign exchange markets on Wednesday, weakening the Australian dollar and other currencies closely linked to commodities markets.
Sufferers in chief were the Aussie, the Chilean peso , which weakened more than 1 percent in American trade overnight, and South Africa’s rand, all of which are usually correlated to the prices of iron, copper and other raw materials.
Copper prices in Shanghai fell five percent overnight. London prices were close to their lowest in more than three years, a reaction to the first bond default in China and the financial stresses it represents.
That was a net positive for the yen, a safe haven in times of economic stress, but had little visible impact on the other major currencies, where a dip for sterling to its lowest this year against the euro was by far the biggest move.
The Aussie, which fell in the final quarter of last year but has recovered some ground since mid-January on the back of improving domestic growth, was down another 0.4 percent after losing 1 percent in the U.S. trading day on Tuesday.
“The commods story is trumping everything,” said Graham Davidson, a spot dealer with National Australia Bank in London.
“The Aussie was certainly well-supported into the end of last week, justifiably on a fundamental basis in my view, but it has traded very, very heavy the last few days.”
Slowing growth and financial sector problems in the world’s second-biggest economy have been a dominant theme of 2014, keeping currency market investors in safer plays like the Japanese yen and Swiss franc.
“If there’s any dominant theme, it’s one of ‘risk-off’ given the concern over the slowdown in China and its financial problems,” said Daragh Maher, a strategist with HSBC in London. “The next break in that might not come until we see more Chinese numbers tomorrow.”
Chinese industrial output, investment and retail sales figures are all due at 0530 GMT on Thursday.
Neither euro zone industrial production numbers nor comments from European Central Bank officials had much influence on prices.
After a boost following last week’s ECB meeting, the euro has struggled to make further ground, bouncing off levels around $1.3915. Maher said he did not feel it looked capable of breaking through $1.40 as flagged by some analysts this week.
“I suspect there will be a temptation to sell any rallies (in the euro) from here,” he said. “But it’s not where the focus is this morning.”
Vincent Crimmins, head of FX strategy and trading at the Bank of Ireland in Dublin, pointed to a close correlation in recent times between euro-dollar exchange rates and the benchmark U.S. and German stock indices
“The DAX is down about 5 percent from recent highs, yet the S&P is just a percent lower. So if the S&P starts to price in these risks, then we’ll see Euro/Dollar trade lower,” he said.
“I’d be bullish Dollars here. The S&P will have to price in some of the risks out there – running from China corporate bond defaults, Crimean tensions – and the ECB’s unwillingness to ease last week is a potential headwind to growth in the Eurozone.”
There were indications that the fall for the Aussie might also have been worse. Almost 40 percent – or around 3 billion Australian dollars – of a sale of government bonds maturing in 2026 went to foreign investors on Wednesday, meaning bond investors may have had to buy the Aussie as it fell.
The yen, steadier so far this year after losing a fifth of its value against the dollar in 2013, was holding strong in early European trading, up 0.1 percent against both the euro and the dollar.
Dealers said the rouble was propped up by central bank support as Russian stock indexes fell again on Wednesday, reacting to the growing chance of western sanctions over Crimea.
“China seems to be slowing down and the Russian economy seems to be facing pressure as stock prices there have fallen sharply. That could slow emerging economies further,” said Takako Masai, manager of forex at Shinsei Bank in Tokyo.
“There is real concern about the global economy at the moment, even if some short-term players may be thinking that the impact of the Ukraine crisis will gradually subside,” she said.