Forex Today: RBA hikes policy rate, Strait of Hormuz tensions remain high
Here is what you need to know on Tuesday, May 5:
Financial markets remain on edge on Tuesday as investors grow increasingly concerned about the continuation of the ceasefire between the United States (US) and Iran. In the second half of the day, the US economic calendar will feature the Institue for Supply Management's (ISM) Services Purchasing Managers' Index (PMI) report for April and JOLTS Job Openings data for March.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.50% | 0.43% | 0.35% | 0.22% | 0.84% | 0.41% | 0.40% | |
| EUR | -0.50% | -0.09% | -0.20% | -0.28% | 0.39% | -0.09% | -0.07% | |
| GBP | -0.43% | 0.09% | -0.11% | -0.20% | 0.48% | -0.00% | 0.00% | |
| JPY | -0.35% | 0.20% | 0.11% | -0.07% | 0.55% | 0.15% | 0.04% | |
| CAD | -0.22% | 0.28% | 0.20% | 0.07% | 0.64% | 0.21% | 0.20% | |
| AUD | -0.84% | -0.39% | -0.48% | -0.55% | -0.64% | -0.48% | -0.47% | |
| NZD | -0.41% | 0.09% | 0.00% | -0.15% | -0.21% | 0.48% | 0.01% | |
| CHF | -0.40% | 0.07% | -0.01% | -0.04% | -0.20% | 0.47% | -0.01% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
After US President Donald Trump launched "Project Freedom" on Monday, which aims to assist neutral vessels in passing through the Strait of Hormuz, Iran reportedly targeted US warships in the region. President Trump also noted that that the US military "shot down" seven Iranian fast boats but Iran denied this claim. Moreover, Iran reportedly attacked an oil depot in the United Arab Emirates (UAE) and caused fire, while South Korea reported damage to a commercial ship. Additionally, the UAE's Defence Ministry said that it confronted 12 ballistis missiles, three cruise missles and four drones launched by Iran on Monday.
After rising about 0.3% on Monday, the US Dollar (USD) Index holds steady at around 98.50 in the European on Tuesday. Meanwhile, crude Oil prices correct lower following Monday's rally. The barrel of West Texas Intermediate (WTI), which rose about 3% on Monday, was last seen trading near $101.50, losing about 1% on the day.
The Reserve Bank of Australia (RBA) announced early Tuesday that it raised the benchmark interest rate by 25 basis points (bps) to 4.35%. This decision came in line with analysts' estimates. In the post-meeting press conference, RBA Governor Michele Bullock explained that the rate hike will help them contain the inflationary shock and added that they will now have time to assess the situation before tightening the policy further. After losing 0.5% on Monday, AUD/USD struggles to gain traction in the European session on Tuesday and trades near 0.7150.
EUR/USD stays in a consolidation phase slightly below 1.1700 after falling 0.25% on Monday. Later in the day, European Central Bank (ECB) President Christine Lagarde will be delivering a speech.
GBP/USD fell about 0.3% on Monday before stabilizing at around 1.3550 early Tuesday.
Japan's Finance Minister Satsuki Katayama reiterated on Monday that they are ready to take decisive action against speculative foreign exchange moves. USD/JPY finds it difficult to gain traction and moves sideways in a narrow channel above 157.00.
Gold (XAU/USD) fell nearly 2% on Monday and touched its lowest level in a month near $4,500. XAU/USD edges higher early Tuesday and trades at around $4,550.
Risk sentiment FAQs
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.
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.
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.
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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