AUD/USD recovers further from over one-month low, climbs beyond 0.6700 amid weaker USD

AUD/USD attracts buyers for the second straight day and draws support from a combination of factors.
A positive risk tone and hawkish RBA expectations underpin the Aussie amid a modest USD downtick.
Bets for smaller Fed rate cuts should limit the USD losses and cap any meaningful gains for the major.

The AUD/USD pair builds on the previous day's bounce from the vicinity of mid-0.6600s, or over a one-month low and gains positive traction for the second straight day on Friday. The momentum lifts spot prices back above the 0.6700 mark during the first half of the European session and is sponsored by a combination of factors.

The Australian Dollar (AUD) continues to draw support from Thursday's upbeat domestic employment details, which dashed hopes for an interest rate cut by the Reserve Bank of Australia (RBA) this year. Furthermore, the underlying bullish tone across the global equity markets prompts some profit-taking around the safe-haven US Dollar (USD), especially after the recent rally to the highest level since early August, and further benefits the risk-sensitive Aussie.

Meanwhile, data released earlier today showed that China's economy expanded 4.6% year-on-year in the July-September period, marking the lowest reading in 18 months. The reading was below the government's full-year target of 5%, offsetting the better-than-expected Retail Sales and Industrial Production figures for September. This, in turn, might hold back traders from placing aggressive bullish bets around the China-proxy Aussie and cap the AUD/USD pair.

Furthermore, bets for a regular 25 basis points (bps) interest rate cut by the Federal Reserve (Fed) in November, bolstered by Thursday's upbeat US macro data, should help limit any meaningful downside for the USD. This further makes it prudent to wait for strong follow-through buying beyond the 50-day Simple Moving Average (SMA) support breakpoint, around the 0.6750 area, before confirming that the AUD/USD pair has formed a near-term bottom.

Investors now look forward to the US economic docket, featuring the release of Building Permits and Housing Starts. Apart from this, Fed Governor Christopher Waller's speech, along with the broader risk sentiment, will drive the USD demand and provide some impetus to the AUD/USD pair. Nevertheless, spot prices remain on track to register losses for the third straight week and the fundamental backdrop warrants some caution before positioning for further gains.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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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