FX Roundup: Euro, commodity currencies head lower

The euro and a plethora of commodity linked currencies headed lower on Monday, while the pound sterling staged a marginal recovery.

Earlier in the session, forex investors factored in another tumble in the Chinese stock market amid concerns about a slowdown in the world’s second largest economy. China’s inflation rose to 1.6% year-on-year, as expected, compared with 1.5% the previous month.

However, the producer price was unchanged at minus 5.9% in December, according to the National Bureau of Statistics. The People’s Bank of China on Monday set the yuan's reference rate against the dollar at 6.5626, up on Friday's fixing of 6.5636.

Jane Foley, senior FX strategist at Rabobank, said, “Although the yuan has lost growth against the dollar since August 2015, the value of China’s effective exchange rate has been on a strengthening trend since the middle of 2014 as currencies such as the euro and the yen weakened.

“If the value of the USD/CNY rises significantly this year there is clear risk that the yuan may also lose ground against the currencies of several of China’s trading partners. This raises the risk that central banks in countries such as South Korea, Australia, the Eurozone and Japan may be forced to retaliate by extending their easing cycles.”

At 1550 GMT, the pound was up 0.13% against the dollar changing hands at $1.4536, but still near its lowest levels versus the greenback in nearly five-and-half years. However, the euro slid lower against the US currency to change hands at $1.0857 down 0.60% nearly negating all the gains of the previous session.

Continuing with major crosses, the dollar also notched gains against the Swiss franc exchanging at CHF0.9978 at 0.30% and registered gains of 0.05% against the yen to change hands at JPY117.4300.

Kit Juckes, head of forex at Societe Generale, said, “The net dollar position has dropped from the highs seen last year, thanks in part to the net yen position turning long for the first time since the earliest days of Abenomics back in 2012.”

“The capitulation of yen shorts is significant but the bigger theme is that USD/JPY and EUR/USD may not be big drivers of FX trends in the days and weeks ahead. Rather, the focus is on what is happening in emerging markets and resource-sensitive currencies. There, the dollar looks set to continue to gain.”

Meanwhile, major commodity linked currencies took another predictable hammering with Brent oil futures slipping back below $33 per barrel. In Latin America, the dollar traded higher against major regional crosses, posting gains versus the Chilean peso (up 52%) and Brazilian real (up 0.31%).

The Canadian dollar came in broadly flat versus the greenback changing hands at $1.4172, but the beleaguered Australian dollar fared better against its US counterpart exchanging at US$0.7003, up 0.72% clawing back some of the previous session's losses. Finally, the New Zealand dollar was up 0.15% exchanging at US$0.6550.