- AUD/USD falls sharply as the US Dollar surges on multiple tailwinds.
- Market sentiment is quite cautious amid a sell-off in global technology stocks on DeepSeek concerns.
- Investors await the Fed’s policy meeting and the Australian CPI data, which will be released on Wednesday.
The AUD/USD pair plunges below 0.6250 on Tuesday. The Aussie pair weakens as the US Dollar (USD) performs strongly in a highly risk-off market environment. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to near 108.00.
Market sentiment is quite risk-averse as global technology stocks have faced a massive sell-off on Chinese DeepSeek’s success in building an affordable Artificial Intelligence (AI) model, unlike top chatbots, such as OpenAI and Meta, which rely on high energy and sophisticated chips. This has resulted in an increase in the US Dollar’s safe-haven demand.
The US Dollar is also performing strongly on the back of growing uncertainty over United States (US) President Donald Trump’s tariff agenda and the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.
US Treasury Secretary Scott Bessent has proposed 2.5% tariff universally, as starters, which will increase at the same pace every month until they reach to 20%, as guided by Trump. Market participants expect that Bessent’s gradual tariff hike approach would allow Trump to negotiate in a better position.
Meanwhile, the Fed is widely anticipated to keep interest rates steady in the range of 4.25%-4.50%. Investors will keenly focus on Fed’s guidance on the monetary policy outlook for the entire year.
On the Aussie front, investors will pay close attention to the Australia Consumer Price Index (CPI) data for December and the fourth quarter of 2024. Compared to the similar quarter of the previous year, the CPI rose by 2.5%, slower than 2.8% in the previous quarter. Quarter-on-quarter CPI is estimated to have grown by 0.3%, faster than 0.2% in the third quarter of 2024.
The inflation data will significantly influence market expectations about when the Reserve Bank of Australia (RBA) will start reducing interest rates. Meanwhile, traders are pricing in a 25-basis points (bps) interest rate reduction in the February’s policy meeting.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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