USD/CAD holds gains above 1.3850 amid fears of a protracted war in Iran
- USD/CAD appreciates for the fifth consecutive day and hits two-month highs past 1.3860.
- Risk aversion amid concerns about a long war in Iran keeps the US Dollar buoyed.
- Fed officials Barr and Jefferson showed concerns about higher inflationary pressures.
The US Dollar (USD) keeps marching higher against the Canadian Dollar (CAD) on Friday. The pair extends gains for the fifth consecutive day, trading at its highest levels in more than two months, changing hands at 1.3860 at the time of writing, as investors brace for an extended Middle East conflict.
The Canadian Dollar remains offered, on track for a more than 1% decline on the week. The positive impact of higher Oil prices has been offset by the US Dollar’s traditional safe-haven status, amid a generalized rush for safety amid concerns that the Middle East war might worsen before it improves.
Confusing messages from the Middle East
Meanwhile, contradictory news from the war is failing to improve investors’ mood. US President Donald Trump affirmed that the negotiations with Iran are going “very well” and extended the deadline to attack Iranian energy sites into April 6.
The Wall Street Journal, on the other hand, affirmed that the Pentagon is planning the deployment of an additional 10,000 troops for an alleged ground invasion, which is likely to extend the war and keep the Strait of Hormuz locked for an indefinite period of time.
In this context, the major central banks are reassessing their monetary policy stances. Federal Reserve (Fed) officials Michael Barr and Philip Jefferson expressed concern about the rising inflationary pressures amid the spike in oil prices. The CME FedWatch Tool reflects a 50% chance of at least one interest rate hike this year, in contrast with the 50 bps rate cuts projected only a month ago. This is providing additional support to the US Dollar.
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.
