Commodity currencies recover, subdued German inflation hits euro

[September 29, 2015]  By Anirban Nag

LONDON (Reuters) - A sell off in growth-linked commodity-related currencies like the Australian and Canadian dollars took a breather on Tuesday, after shares in mining and trading giant Glencore stabilized, having fallen by almost a third at the start of the week.

The euro, which has benefited from a recent unwinding of risky leveraged trades, lost ground after German and Spanish inflation data highlighted subdued inflationary pressures in the euro zone. That kept alive chances of more quantitative easing from the European Central Bank.

Earlier, a wave of risk aversion amid mounting concern about Glencore's debt, falling base metals and oil prices saw the Australian dollar weaken to trade near 6-1/2 year lows while the Canadian dollar hit a 11-year low.

The Australian dollar was last down just 0.1 percent at $0.6983, recovering from a low of $0.6934, while the dollar was flat against the Canadian unit at C$1.3408, having risen to a 11-year higher earlier in the day.

Nevertheless, sentiment toward risky assets and currencies was brittle as concerns about Glencore remained a talking point and a Japanese shipper filed for bankruptcy, the latest sign that tumbling energy and raw material prices are triggering a sector-wide crisis and forcing investors to cut back on leveraged positions in riskier assets.

Deepening concerns about the health of the global economy, a recent sharp correction in stock markets and mixed messages from Federal Reserve officials led to a drop in front-end U.S. yields, and weighed on the dollar.

The Swiss franc was 0.1 percent higher against the dollar at 0.9721 francs per dollar, while it was 0.2 percent higher against the euro at 1.0925 francs a euro. The yen was slightly firmer on the day against the dollar, trading at 119.90.

"The market thinks the latest bout of risk aversion will drive the Fed to postpone a rate hike," said Niels Christensen, FX strategist at Nordea. "That is weighing on the dollar, while the yen and the franc are trading higher."

Many investors had been expecting the Fed to start raising rates by the end of this year, but latest comments from senior officials have clouded the outlook for a lift-off.

William Dudley, head of the New York Fed, and John Williams, head of the San Francisco Fed, both signaled support for a hike this year but Charles Evans, head of the Chicago Fed, called for rates to stay near zero until mid-2016.

The euro was down 0.2 percent against the dollar and the yen as Spanish consumer prices fell at their fastest rate in seven months in September and regional data out of Germany pointed to inflation stuck around zero.

"If euro zone inflation prints below market consensus tomorrow, expectations of more asset purchases from the ECB will be boosted," said Petr Krpata, FX strategist at ING. "The uncertainty about more QE by the ECB is not good for the euro."

Euro zone flash inflation for September is due for release on Wednesday and is expected to a show a reading of 0 percent, year-on-year, lower from 0.1 percent a month ago. That is well below ECB's target of around 2 percent for inflation.

(additional reporting by Ian Chua; editing by Dominic Evans)

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