AUD/USD extends gains to 0.6950 amid higher appetite for risk

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The Australian Dollar (AUD) is outperforming most of its peers on Wednesday, and extends gains against the US Dollar (USD), reaching the mid-range of 0.6900s, from 0.6833 lows on Tuesday, fuelled by higher risk-appetite amid hopes of a swift end to the Iran war.

AUD/USD appreciates to 0.6950 after bouncing from 0.6833 lows on Tuesday.
Trump's hint at the end of the war in Iran has boosted market sentiment.
Australian manufacturing sector's activity contracted against expectations in March.

US President Trump affirmed on Tuesday that he is planning to end the war in the Middle East in the next two or three weeks, even if a deal with Tehran remains elusive. He also affirmed that he expects the Strait of Hormuz to be reopened “automatically” once the attacks end.

Equity markets worldwide surged following the comments. Asian markets closed with strong gains, and most European indexes are posting advances nearing 2% at the time of writing, with Wall Street futures pointing in the same direction. Oil prices and the US Dollar have tumbled, while risk-sensitive assets, like the AUD, are shining.

Aussie’s recovery has been unfazed by mixed Australian figures, which have cast some doubt on the hawkishly-leaning minutes of the Reserve Bank of Australia’s March monetary policy meeting. Data released earlier on Wednesday showed a stronger-than-expected rebound in Building Permits in February, but the S&P Manufacturing Purchasing Managers’ Index (PMI) revealed that the sector’s activity contracted, highlighting a heavy toll from the war.

The US calendar gathers pace on Wednesday, with the release of March’s ADP Employment Change and the ISM Manufacturing PMI, and February’s Retail Sales figures. These releases are likely to set the tone for Friday’s all-important Nonfarm Payrolls report, which is forecasted to show a solid improvement in net jobs, following February’s 92,000 decline.

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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