FX Roundup: Pound drops, commodity currencies continue downward spiral

The pound sterling dropped to a five-and-half-year low against the dollar on Thursday, after UK Chancellor George Osborne warned about the British economy facing challenges over the next 12 months, while commodity linked currencies slipped further in European trading.

Addressing business leaders in Cardiff, Osborne said the UK faces a "cocktail" of macroeconomic challenges arising out of a slowing global economy, geopolitical tension in the Middle East and turmoil in the commodities market.

The Chancellor added that far from "mission accomplished" on the economy, "2016 is the year of mission critical".

At 1637 GMT, the pound was down 0.40% against the dollar changing hands at $1.4572. Earlier the British currency dropped to $1.455 – its lowest level versus the greenback in nearly five-and-half years – before posting a recovery.

However safe have demand continued to perk up the yen, with the dollar slipping another 0.34% to change hands at JPY118.0700. The euro also made gains against the US currency to change hands at $1.0853 up 0.67%.

Kit Juckes, head of forex at Societe Generale, “The yen is just like an umbrella - very useful on days like this and ramming home the fact that it remains the pre-eminent risk-off currency.

“The yen is by some distance the ‘cheapest' of the major currencies on the valuation metrics I use. Stay/get short GBP/JPY, NZD/JPY, CNH/JPY and long JPY/KRW. Shanghai equity weakness reinforces the yen's safe haven status.”

Meanwhile, major commodity linked currencies took another predictable hammering with Brent oil futures dipping to a fresh 11-year low, and natural resources enduring a torrid session on the London Metal Exchange.

The already beleaguered Australian dollar fell against its US counterpart exchanging at US$0.7024 down a further 0.68% extending overnight declines, while the New Zealand dollar was broadly flat at US$0.6650, up 0.16%.

Jane Foley, senior FX strategist at Rabobank, said, “Over the past five days AUD/USD has tumbled around 3.6%. The NZD is the second worst performer of the G10 currencies dropping 2.9% in the same time frame. It is not just the currencies that are falling in this part of the world. This morning the ASX 200 closed over 2% lower, driven down by mining and energy stocks. This was the fifth day of losses for the index.

“The weakness of both the AUD and the ASX has been a direct response to concerns that the Chinese authorities could be prepared to allow the yuan to weaken, which could involve a heavy cost to Australia’s external sector. We see heightened risk of further Reserve Bank of Australia easing and remain bearish on AUD/USD, looking for a move towards 0.66 medium-term.”

Finally, the greenback shed some gains against the Canadian dollar changing hands at CAD$1.4059, down 0.12%. But in Latin America, the dollar traded higher against major regional crosses, posting gains versus the Chilean (up 1.02%), Mexican (up 0.63%) and Colombian (0.93%) pesos, and the Brazilian real (up 0.44%).