Currency watch: World waking up to global problems

Commodity currencies have been smashed over the past few weeks, as the market has woken up to the fact that a global slowdown is likely – as opposed to one which is confined to the developed world.

Chinese growth is still forecast to be around 9% this year so it is far from anaemic. However, any slowdown in the world’s manufacturing engine room will of course have an effect on the profitability of mineral resource companies and the wider mining dependent economy.

Everything that isn’t a US dollar or a US treasury bond is being viewed as risky at the moment. Asian currencies have slipped in recent weeks and this has caused the Koreans to intervene in markets to protect the value of the won.

The South Korean central bank is said to have spent around US$4 billion last Friday to maintain some stability in prices, but further volatility will be seen over the coming sessions.

Sterling will stand to benefit to a certain extent from a flight from these commodity currencies, and we have seen a good 5-6% increase in GBP versus AUD, NZD and ZAR since the Federal Reserve first talked about further policy easing.

It is not a long-term safe haven, however, as the impact of the austerity measures and the reemergence from this “soft patch” must first be seen.

Jeremy Cook is chief economist at World First foreign exchange