- AUD/USD struggles to capitalize on modest intraday gains amid reviving USD demand.
- China’s economic woes further contribute to capping gains despite RBA’s hawkish bias.
- Investors look to US Trade Balance data ahead of Chinese trade figures on Wednesday.
The AUD/USD pair attracts fresh sellers following an intraday uptick to the 0.6540 region and drops to the lower end of its daily range during the first half of the European session on Tuesday. Spot prices currently trade around the 0.6500 psychological mark and for now, seem to have stalled the goodish recovery move from the YTD low touched on Monday.
The Australian Dollar (AUD) got a minor lift earlier this Tuesday after the Reserve Bank of Australia (RBA) kept interest rates unchanged and indicated that it will keep policy restrictive in the wake of still sticky inflation. The outlook was reaffirmed by RBA Governor Michele Bullock, saying that inflation might take too long to return to target and that interest rates might need to remain higher for an extended period. This, along with a positive turnaround across the global equity markets, offered some support to the AUD/USD pair.
That said, concerns about an economic downturn keep a lid on any further appreciating move for the China-proxy Aussie. Apart from this, a goodish pickup in the US Dollar (USD) demand, bolstered by a solid bounce in the US Treasury bond yields, further contributes to capping the upside for the AUD/USD pair. This, along with the risk of a further escalation of geopolitical tensions in the Middle East, makes it prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom.
Tuesday's US economic docket features the only release of Trade Balance data, leaving the USD at the mercy of the US bond yields. Furthermore, the broader risk sentiment will play a key role in influencing the near-term USD price dynamics and provide some impetus to the AUD/USD pair ahead of Chinese Trade Balance data during the Asian session on Wednesday.
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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