New Zealand Dollar gives away gains amid renewed tensions in the Middle East

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NZD/USD returns to levels below 0.5700 after rejection at the 0.5725 area.
Trump's comments suggesting the end of the US-Iran ceasefire have triggered a fresh bout of risk aversion.
Previously, a hawkish hike by the RBNZ had provided a fresh boost to the Kiwi.

The New Zealand Dollar’s (NZD) rally against the US Dollar (USD) has been short-lived, as the pair returned to sub-0.5700 levels during the European session after being rejected at the 0.5725 area earlier in the day. Market concerns about the status of the US-Iran ceasefire have hammered risk appetite, offsetting the positive Kiwi's reaction to the Reserve Bank of New Zealand’s (RBNZ) hawkish hike.

US President Donald Trump affirmed earlier on Wednesday that the ceasefire is no longer in effect, and that, in his opinion, the memorandum of understanding “is over,” although he added that negotiators can “keep talking if they want.”

These remarks come after the rival countries exchanged attacks earlier on the day and the US revoked Iran's authorization to export Crude. The resumption of the hostilities has boosted US Treasury yields, sending the safe-haven US Dollar higher against its main rivals, although the Greenback’s rally remains contained within previous ranges so far.

In New Zealand, the RBNZ hiked interest rates by 25 basis points to 2.5%, as widely expected, with the bank’s statement leaving the door open for further monetary tightening. The Kiwi Dollar rallied against its main peers immediately after the decision.

In the US, the focus on Wednesday is on the release of the minutes of the last Federal Open Market Committee (FOMC) meeting. The central bank delivered a hawkish hold in the first meeting under Kevin Warsh’s direction, and investors will be eager to know more about the bank’s monetary tightening calendar.

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.