USD/CAD remains bid near 1.3700, buoyed by the risk-off mood

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The US Dollar (USD) appreciates for the second consecutive day against the Canadian Dollar (CAD). Bulls have failed to find acceptance above 1.3700 earlier on the day, but the pair remains bid, trading at 1.3685, with the safe-haven USD favoured by the dismal market mood.

USD/CAD consolidates right below 1.3700 following a two-day rally.
Risk aversion on concerns about a potential AI bubble is supporting the USD.
Lower Oil prices are weighing down the commodity-sensitive Loonie.

Disappointing quarterly earnings from some of the US big tech firms, including Google's Alphabet, have triggered a rout in the sector, which has been weighing on equity markets around the world. Most European markets are showing moderate losses, heading into the lunch break, although Wall Street futures are pointing to a mixed opening.

US labour market's concerns reemerge

US data released on Wednesday showed mixed figures. The US ISM Services PMI showed stronger-than-expected business activity in January, although the poor employment sub-index and the sharp slowdown shown by the ADP Employment report resurfaced concerns about the US labour market.

In that sense, US Jobless Claims numbers and the JOLTS Job Openings figures, due later on Thursday, will be analysed in detail.

In Canada, the economic docket has been light this week, but the lower Oil prices are acting as a headwind for the Canadian Dollar’s recovery. The price of the benchmark US WTI crude barrel has bounced up from weekly lows but remains more than $2 below last week's highs above $66.00, weighed by easing supply concerns as tensions between the US and Iran de-escalate.

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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