Risk conditions started to deteriorate during the New York session on Tuesday with renewed concerns surrounding the outlook for Chinese growth amid speculation over increased bond defaults and worsening credit crunch. USD/JPY initially retreated to the 102.80 area with a sharp drop in copper prices helping to put sustained downward pressure on AUD/USD.
The risk aversion trend was generally sustained on Wednesday with Asian equity markets dropping sharply and USD/JPY was unable to regain the 103 level. Risk and geo-political issues tended to dominate, especially with no significant economic data releases.
There were further attempts by ECB officials to introduce more two-way risk into the Euro. Spanish representative Linde stated that the accommodative ECB policy might lead to a stronger dollar and he also warned that further monetary action may be needed to offset the impact of maturing LTROs in 2015. Fellow member Praet was also concerned over the very weak growth in money supply and the comments are potentially important given his role as chief economist within the bank. Markets remained unimpressed by the comments, however, with no significant selling pressure on EUR/USD as it found support below 1.3850.
There were further concerns surrounding the situation in Ukraine with a contentious referendum in the Crimea region this weekend. G7 countries issued a fresh statement calling on Russia to stop attempts to change Crimea’s status and also stated that any independence vote would not be recognized.
EUR/USD had already moved higher following the inability to break lower and the G7 statement helped push the pair back to the key 1.3900 resistance area. There was selling interest in this region, but the dollar was unable to gain much traction as USD/CHF tested 3-year lows just below the 0.8750 level.
Sterling remained on the defensive during Wednesday and GBP/USD briefly dipped below the important 1.6580 level in Europe. Selling pressure was compounded by a EUR/GBP break above the 0.8350 level before some relief later in the session on wider dollar vulnerability.
Underlying risk conditions remained fragile, but USD/JPY found support on approach to 102.50 while AUD/USD was also able to recover from lows near 0.8920 to 0.8970.