Currencies of Commodity Exporters Drop on China Outlook

Currencies of commodity-exporting nations dropped as a gauge of raw materials slid to a five-year low on speculation demand will drop after China signaled slower economic growth.

The Australian dollar sank to a seven-month low against its U.S. counterpart, dropping against most of its 31 major peers, while South Africa’s rand and Brazil’s real weakened. The euro pared gains as European Central Bank President Mario Draghi said the region’s recovery is losing momentum. The pound climbed. Federal Reserve Bank of New York President William C. Dudley said a sharply stronger dollar could hamper U.S. central-bank efforts to spur growth.

“The China story is important, and so seeing some weakness in these currencies at a time when some of these commodity prices are under pressure, I certainly would put it as a factor,” said Robert Lynch, a currency strategist at HSBC Holdings Plc in New York. He cautioned that correlation between currencies and commodities has diminished this year.

Australia’s dollar fell 0.6 percent to 88.73 U.S. cents at 5 p.m. New York time and touched 88.53 cents, its lowest level since Feb. 4. It dropped 0.8 percent to A$1.4482 per euro.

The euro appreciated 0.2 percent to $1.2849 after rising as much as 0.3 percent. It sank earlier to $1.2816, the weakest level since July 2013. The greenback declined 0.2 percent to 108.84 yen, after reaching 109.46 yen on Sept. 19, the strongest level since August 2008. The European currency was little changed at 139.85 yen.

Volatility Rises

A gauge of foreign-exchange market price swings increased for the first time in five days. The JPMorgan Chase & Co. Global FX Volatility Index rose to 7.32 percent, after closing Sept. 19 at 7.27 percent. The 2014 average is 6.88 percent.

The pound was the biggest gainer among the U.S. currency’s 16 major peers. South Africa’s rand slid the most after Brazil’s real, which dropped as investors awaited polls gauging President Dilma Rousseff’s re-election prospects amid a recession and inflation.

Sterling climbed after Scotland voted in a referendum last week to keep the U.K.’s 307-year-old union intact, allowing the Bank of England to turn its attention back to the issue of when to raise interest rates from a record low. While some recent economic data fell short of analyst estimates, the U.K. still has the fastest growth among the Group-of-Seven nations.

“The macro-economic backdrop to the U.K. economy has been broadly supportive for the medium-term sterling outlook,” said Athanasios Vamvakidis, head of Group-of-10 foreign-exchange strategy at Bank of America Merrill Lynch in London. “This has reinforced our view that the Bank of England will start hiking rates in early 2015, most likely in February.”

Pound Gains

The pound gained 0.5 percent to $1.6361. The U.K. currency appreciated 0.3 percent to 78.53 pence per euro after advancing on Sept. 19 to 78.10 pence, the strongest level since July 2012.

Sterling rose 7.9 percent in the past year in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the best performance. The dollar gained 5.3 percent, while the euro dropped 0.5 percent and the yen lost 4.8 percent.

ECB President Draghi told the European Parliament’s economic and monetary committee in Brussels that risks to the euro-area recovery are on the downside. An appreciated exchange rate is a risk to the sustainability of that recovery, he said, adding that policy makers can implement more stimulus if required to stave off deflation. The central bank lowered its deposit rate to minus 0.2 percent this month.

‘Helpful Hint’

“Mentioning specifically the exchange rate and the like is always a very helpful hint,” said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York. “What a negative interest rate does is mainly drive the exchange rate lower. I think that’s not very well reflected in the exchange rate at this point in time.”

The Bloomberg Dollar Spot Index rose to the highest level on a closing basis since June 2010, amid bets the Federal Reserve will raise interest rates in mid-2015 for the first time since 2006. The measure increased 0.1 percent to 1,056.80. Futures trading shows a 56 percent likelihood of a rate increase by July 2015.

The New York Fed’s Dudley, in unusually direct remarks about the U.S. currency from the central bank, said if the dollar “were to strengthen a lot” there would be consequences for economic growth. He spoke in an interview at the Bloomberg Markets Most Influential Summit in New York.

China Slump

The Bloomberg Commodity Index declined to the lowest level since July 2009, touching 118.20, after Chinese Finance Minister Lou Jiwei said yesterday that growth in the world’s second-largest economy faces downward pressure.

Roubini Global Economics LLC forecast the Aussie dollar may fall below 75 U.S. cents as the nation’s economy expands as little as 2 percent next year amid the slowdown in China, Australia’s biggest trader partner, the Sydney Morning Herald reported. The newspaper cited David Nowakowski, the firm’s senior director of research.

“The Aussie dollar is caught between a rock and a hard place,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “The normalization of U.S. monetary policy is exerting downward pressure upon commodity prices. And then there is the impact from slowing Chinese growth. All told, it’s going to be a difficult fourth quarter for the currency.”

The Australian dollar slid 2.5 percent in the past month, the worst performer among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes.

Rand Drops

South Africa’s rand reached the lowest level since February, falling as much as 1 percent to 11.1881 per dollar before trading at 11.1720. The nation is the world’s largest platinum producer and sixth-largest gold miner.

Brazil’s real slid 1.2 percent to 2.3979 per greenback, and Canada’s dollar weakened 0.7 percent to C$1.1044 to its U.S. counterpart.

A Bloomberg index of 20 emerging-market currencies reached a reading of 88.41, the lowest level in more than five years.

“China is weighing on markets, particularly on the commodity group, and we’ve also seen commodity prices take a big hit overnight,” Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington, said in a phone interview.

(An earlier version of this story was corrected to show the currency-market volatility average was for 2014.)

Before it's here, it's on the Bloomberg Terminal.