In recent market movements, safe-haven currencies such as the US Dollar (USD) and the Japanese Yen have remained strong against risk-sensitive currencies. European economic data for May, including business and consumer sentiment, as well as the Unemployment Rate for April, will be on the economic docket. Additionally, the US Bureau of Economic Analysis will release its second estimate of first-quarter Gross Domestic Product (GDP) growth and the US Department of Labor will publish weekly Jobless Claims data later in the day.
The USD has shown strength this week, with the USD Index gaining 0.5% and reaching a two-week-high. Major equity indexes in the US declined on Wednesday, leading to a more negative stance in early Thursday trading. The benchmark 10-year US Treasury bond yield also increased toward 4.6%. New Zealand’s Finance Minister presented the government’s annual Budget for 2024, forecasting a drop in inflation to below 3% in the third quarter of 2024.
Despite the broad-based USD strength, USD/JPY declined as the Japanese Yen benefitted from safe-haven flows. EUR/USD experienced a significant decline on Wednesday, while GBP/USD also faced pressure, trading below 1.2700. XAU/USD (Gold) lost nearly 1% on Wednesday but held steady around $2,330 early Thursday.
Understanding risk sentiment, or the terms “risk-on” and “risk-off,” is crucial in financial markets. During a “risk-on” phase, investors are optimistic and willing to take on risk, leading to rising stock markets and commodity prices. In a “risk-off” scenario, investors become more cautious, shifting towards less risky assets such as bonds and safe-haven currencies like the Japanese Yen and Swiss Franc.
In a “risk-on” market, currencies heavily reliant on commodity exports like the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD) tend to rise. Conversely, in a “risk-off” environment, the US Dollar, Japanese Yen, and Swiss Franc typically strengthen. The US Dollar benefits from its status as a reserve currency, while the Yen and Franc gain due to their safe-haven appeal. Understanding these dynamics can help investors make informed decisions based on prevailing market sentiment.
