Market Data 
- AUD/USD climbs to a multi-week top and draws support from a combination of factors.
- The RBA’s hawkish outlook and stronger Chinese inflation figures for July lend support.
- A positive risk tone, 50 bps Fed rate cut bets undermine the USD and benefit the Aussie.
The AUD/USD pair builds on this week’s solid recovery move from the 0.6350 area, or its lowest level since November 2023 and climbs to a two-and-half-week high on Friday. Spot prices now seem to have found acceptance above the very important 200-day Simple Moving Average (SMA), with bulls awaiting a sustained strength beyond the 0.6600 round-figure mark before placing fresh bets.
Against the backdrop of hawkish comments from Reserve Bank of Australia (RBA) Governor Michele Bullock, stronger Chinese inflation figures provide an additional lift to the Australian Dollar (AUD). On Thursday, Bullock emphasized the need to stay vigilant about inflation risks and indicated a willingness to hike rates if necessary. Moreover, the National Bureau of Statistics reported this Friday that consumer prices in China rose by 0.5% in July from a year ago as compared to expectations for a print of 0.3%.
Additional details revealed that the headline CPI climbed 0.5% in July, the highest since February, overshadowing the fact that the Producer Price Index shrank for a 22nd consecutive month, by 0.8% in July. Nevertheless, the data eased worries about a deeper economic downturn in China, which, along with receding fears of a US recession, boosts investors’ appetite for riskier assets. This, in turn, undermines the safe-haven US Dollar (USD) and contributes to driving flows towards the risk-sensitive Aussie.
The Greenback is further weighed down by a fresh leg down in the US Treasury bond yields, triggered by rising bets for bigger interest rate cuts by the Federal Reserve (Fed) in September. In the absence of any relevant market-moving US economic data, the fundamental backdrop supports prospects for a further appreciating move for the AUD/USD pair. Nevertheless, spot prices remain on track to register strong weekly gains for the first time in the previous four as the focus shifts to the US CPI report next Wednesday.
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.
