Commodity Currencies Battered On China, Yield Issues

What started out as a slip from China ended in a rout through the commodity space yesterday. Fears over the state of the global economy combined with poor manufacturing data from the US, and a knee-jerk safe-haven reaction following the horrific scenes in Boston overnight, have left markets considerably lower than where they were this time yesterday.

The big fallers yesterday started early following the poor Chinese news overnight. Growth slipped to 7.7% in Q1 against Q4’s number of 7.9%. The ensuing sell-off of all commodities (gold, silver, oil) saw currencies highly correlated with those commodities such as AUD, NZD, ZAR and CAD take a beating throughout the session. Likewise, the haven currencies of the JPY, CHF and USD all came better through the day’s trade. We have seen a fight back for these commodity currencies overnight as traders came in to scoop up markets on the cheap, but things are feeling a lot more skittish than they have in a fair while.

Sentiment is unlikely to be improved today with a sharp dip in German investor confidence due in today’s ZEW survey. Last month’s figure was a multi-year high as the market still remained ambivalent to the risk posed by Cyprus, Slovenia, the political vacuum in Italy and falls in German productivity – the market is looking for a sharp slip lower as investors became aware that the Eurozone remained the most broken area in world finance.

Inflation in the Eurozone should also be shown to be remaining below target for another month today as pressure increases on the ECB to do something – anything – to help the Eurozone economy. A speech from Mario Draghi yesterday emphasised however, that the ECH feels that it has done everything it can for now to help the region without political expedience first.

Inflation is also due from the UK today before tomorrow’s unemployment figures, Bank of England minutes and Thursday’s retail sales numbers. While the CPI release is expected to show no increase from last month’s 2.8%, the pressure definitely remains to the upside following reports of higher input prices in the latest manufacturing releases. The recent falls in oil may temper this in the long run however.

Data from the US is more than likely to increase pressure on the USD, especially if we see a continued pull higher for assets that were discarded in yesterday’s trade. Lower inflation is expected while industrial production should also show that the strength of the recovery remains very much in question.