NZD/USD trades with caution near 0.5800 as Iran rejects US ceasefire proposal

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The NZD/USD pair trades cautiously near 0.5800 during the Asian trading session on Thursday.

NZD/USD remains on the edge around 0.5800 as Iran wants the US to fulfil its demands before ceasefire talks.
Major demands from Iran include the guarantee of a total end to the war, and the closure of US bases in the Middle East.
RBNZ’s Breman said that monetary policy adjustments could be done on either side.

The NZD/USD pair trades cautiously near 0.5800 during the Asian trading session on Thursday. The Kiwi is under pressure as Iran’s rejection to ceasefire proposal and 15-point settlement plan by United States (US) President Donald Trump has raised concerns over hopes of de-escalation in Middle East conflicts.

On Wednesday, Iran's Fars news agency reported that Tehran doesn't see the truce and talks as viable in current conditions. Also, Iran demands completion of its key demand before involving in direct talks with Washington, Wall Street Journal (WSJ) reported, which includes the closure of all US bases in the Gulf, reparations for attacks, lifting all sanctions, allowing Iran to retain its missile program without restrictions, and the recognition of Iran’s authority over the Strait of Hormuz.

Uncertainty surrounding the outlook of the war in the Middle East has improved the demand for safe-haven assets, such as the US Dollar (USD). As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to Wednesday’s gains around 99.65.

In addition to heightened geopolitical tensions, firm expectations that the Federal Reserve (Fed) will not commit any dovish monetary policy adjustment this year are also keeping the US Dollar on the front foot.

In New Zealand (NZ), the central bank has warned of high inflation and has kept the likelihood of monetary policy adjustment on either side. "We don’t want to react too soon to inflationary pressures that we can do little about, but we don’t want to wait too long in case we see those inflationary pressures becoming more-long lasting, Reserve Bank of New Zealand Governor Anna Breman said earlier this week, Reuters reports, and added, “I will not rule out either rate hikes or rate cuts because of the uncertainty in the global environment.”

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.