The Australian Dollar (AUD) trades 0.65% lower to near 0.6985 against the US Dollar (USD) during the Asian trading session on Monday. The AUD/USD pair faces intense selling pressure as risky assets are facing the heat of boiling oil prices, escalating war in the Middle East that involves the United States (US), Israel, and Iran.
S&P 500 futures are down over 2% in the opening trade, indicating dismal market sentiment. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, surges over 0.7% to near 99.60, reclaims its over three-month high.
WTI oil price soars over 25% in the Asian trade above $110.00 after several Iranian oil depots were hit by strikes overnight, in a joint operation by the US and Israel, BBC reported.
Surging oil prices are an unfavorable scenario for riskier currencies, given that higher energy prices result in a higher outflow of foreign funds from the economies.
Regarding the rising oil prices, US President Donald Trump has stated through a post on Truth.Social that it is a “very small price to pay” to get insured from Iran building nuclear facilities that could have bigger consequences.
In the US, investors will focus on the US Consumer Price Index (CPI) data for February, which will be published on Wednesday. The impact of February’s inflation would be limited on expectations for the Federal Reserve’s (Fed) monetary policy outlook, as it would lack the influence of rising oil prices amid the Middle East war.
(This story was corrected at 03:15 GMT to say in the first bullet point that AUD/USD plummets over 0.6% to near 0.6985, not 6%)
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.
