AUD/USD eases trims gains but remains near YTD highs above 0.6600
- The Aussie stands tall, near year-to-date high as trade deals boost risk appetite.
- The US reached a deal with Japan on Wednesday, is closing in on another with the Eurozone, and will resume talks with China next week.
- Hawkish comments from RBA's Bullock cast doubt on an August rate cut.
The Aussie is pulling back from the eight-month highs at 0.6625 hit earlier today, as the US Dollar pares some losses, but remains above 0.6600, consolidating gains after having rallied about 2% over the last five days.
The trade deal between the US and Japan and hopes of an immediate agreement with the Eurozone have eased concerns about a global trade war and are boosting investors’ appetite for risk.
Apart from that, US Treasury Secretary Scott Bessent affirmed earlier this week that US and Chinese officials will meet in Stockholm next week, aiming to extend the tariff deadline. This news adds support to the AUD, as China is Australia’s major trading partner.
Earlier today, RBA Governour, Michelle Bullock, reiterated the need for a cautious approach on interest rates as she assessed, inflationary risks have been brought under control without deteriorating the labour market. These comments cast doubt on the widely expected rate cut after the August 12 meeting and have provided additional support to the Aussie.
The US Dollar, on the other hand, remains on the defensive amid the positive market sentiment, with investors awaiting US Preliminary PMI figures and weekly Jobless claims data for further insight into the economic activity and the momentum of the labor market.
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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