AUD/JPY continues to remain stronger for the third successive session, trading around 94.50 during the Asian hours on Tuesday. The currency cross receives support from increased risk appetite since US President Donald Trump announced a “complete and total” ceasefire between Israel and Iran. Iran media says latest missile waves were final salvo before ceasefire took effect at 4:00 GMT.
Market sentiment strengthens despite Iran’s retaliatory strike on Al Udeid, a US military base in Qatar. Qatar officials said that the missile barrage was intercepted and that the base had been evacuated in advance. Markets also reacted as Tehran decided to avoid targeting the strategic Strait of Hormuz.
Trump’s comments came shortly after Iran fired missiles at the Al Udeid Air Base in Qatar on Monday. Qatar officials said that the missile barrage was intercepted and that the base had been evacuated in advance.
S&P Global data showed on Monday that Australia’s Manufacturing Purchasing Managers Index remained consistent at a 51.0 reading in June. Meanwhile, the Services PMI edged higher to 51.3 from the previous reading of 50.6, while the Composite PMI improved to 51.2 in June from 50.5 prior. The upbeat data dampened the expectations of a short-term rate cut by the Reserve Bank of Australia (RBA).
The upside of the AUD/JPY cross could be restrained as the Japanese Yen (JPY) receives support from hawkish signals from the Bank of Japan’s (BoJ) officials, who cite persistent core inflation driven by firms passing wage increases onto prices as a reason for further policy tightening.
Japan’s Economy Minister, Ryosei Akazawa, is planning his seventh visit to the United States (US) on June 26, raising hopes for a US-Japan trade agreement ahead of the July 9 deadline for steep reciprocal US tariffs.
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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