AUD/USD eases below 0.7050 as the market digests the ceasefire in Iran

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The Australian Dollar (AUD) is trading higher against the US Dollar (USD) for the third consecutive day on Wednesday, boosted by investors’ optimism about the ceasefire in Iran.

AUD/USD pulls back to 0.7040 from session highs at 0.7085.
The Aussie has rallied more than 2% so far this week.
Recent Australian data has increased concerns about the inflationary impact of energy prices.

The Australian Dollar (AUD) is trading higher against the US Dollar (USD) for the third consecutive day on Wednesday, boosted by investors’ optimism about the ceasefire in Iran. The pair, however, has retreated from session highs at 0.7084 during the European trading session, returning to levels around 0.7040 at the time of writing as the dust from the US-Iran deal settled.

News that Washington and Tehran had reached a deal to stop the hostilities for two weeks, less than two hours before US President Trump’s deadline, was welcomed by the market during Wednesday’s Asian session. Risk-sensitive assets like the Aussie rallied sharply while the US Dollar and Oil prices retreated sharply.

Direct US-Iran negotiations

The deal is still fragile, and Iran said it keeps its finger on the trigger, but the market remains hopeful that Tuesday’s agreement might lead to a durable peace and lower energy prices. Iranian authorities also affirmed that direct talks with US negotiators will start on Friday in Islamabad, Pakistan, feeding hopes of de-escalation of the tensions in a highly volatile area.

Data from Australia released earlier this week showed that the TM-MI Inflation Gauge posted its sharpest monthly advance in history, with a 1.3% increase in March, following a 0.2% decline in February. Year-on-year, inflation accelerated to 4.3%, its highest level in more than two years. These figures increase concerns of stagflation and pose a significant challenge for the Reserve Bank of Australia’s (RBA) policymakers.

In the US, the focus on Wednesday will be on the minutes of the March Federal Open Market Committee (FOMC), which might give some further insight into the bank's next monetary policy steps. These comments, however, will be contrasted by Friday’s Consumer Prices Index (CPI) figures, the first hard data reflecting the inflationary impact of Iran’s war.

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.