Australian Dollar remains depressed near two-month lows in risk-off markets
- AUD/USD is hovering a few pips above two-month lows at 0.6987.
- Escalating tensions in the Middle East keep risk appetite subdued and weigh on the Aussie.
- The US Dollar is drawing support from rising expectations of Fed rate hikes.
The Australian Dollar (AUD) has given away previous gains and is trading lower for the third consecutive day against a stronger US Dollar (USD) on Thursday. The uncertain situation in the Middle East continues to weigh on the risk-sensitive Aussie, while rising bets of Federal Reserve (Fed) rate hikes are buoying the Greenback.
Investors remain averse to risk as the US and Iran exchange attacks for the second consecutive day, with news from the region giving conflicting views. US President Donald Trump threatened earlier on Thursday with further attacks if Tehran does not sign a peace deal, while CNN reported that negotiations are still on track, citing diplomatic sources.
On the macroeconomic front, US Consumer Price Index (CPI) figures released on Friday showed the hottest yearly inflation levels in more than three years. These figures, coupled with the strong labour market report released last week, have boosted hopes that the US central bank will have to hike rates at least once this year, which is providing additional support to the USD.
In Australia, the calendar has been thin this week. Trade Balance data from China, a key partner, was supportive, but the positive impact on the Aussie was offset by weak Australian consumer confidence data and fears of an all-out war in Iran, which would extend the closure of the Strait of Hormuz.
Next week, the focus will shift to the Reserve Bank of Australia (RBA), which is expected to keep rates on hold and might shed some light on the next steps as weak Australian data have boosted speculation about rate cuts.
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.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
