Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

What Happened To AUD, NZD And USD?

Published 04/25/2017, 10:35 AM
Updated 05/14/2017, 06:45 AM

Experienced traders will remember a few years ago, when markets were much simpler.

For a period of time when the Fed was considering tapering asset purchases, it seemed like every day was either "risk-on", where stocks, higher-yielding currencies and commodities rallied in sync, or a "risk off" day, where bonds, gold, the dollar and Japanese yen led the way. Because these moves relied on handicapping the likelihood of continued QE from the Fed, they often were driven by counterintuitive causes; for instance, ostensibly "good" economic news (say, from a strong US jobs report) would typically lead to a risk-off day, making the US central bank more likely to end its QE program, whereas "weak" economic figures could actually increase the market's risk appetite because it meant that the liquidity spigots continued to flow full bore.

While we have hardly returned to those simpler times, this weekend's French election was as close to a pure "risk-on" event as we've seen in awhile. As expected, centrist Emmanuel Macron advanced to the second round vote scheduled for May 7, as did Euroskeptic Marine Le Pen. Many traders fear that a Le Pen victory would throw the region into turmoil, but that outcome seems far less likely after Le Pen underperformed her polls and the other candidates immediately threw their support behind Macron, in some cases before the votes were even fully counted.

Investors cheered the outcome, with major stock indices surging by over 1% across the globe and safe-haven assets like gold, the Japanese yen and bonds all falling. On the volatility front, the VIX, a measure of expected volatility in US stocks, fell by nearly 25% to below 11, its largest 1-day percentage drop since 2011.

Though many markets followed the risk-on script, there was a pair of interesting outliers in the FX market: both the Australian and New Zealand dollars had relatively lackluster days yesterday. Both currencies are supported by central banks with relatively high benchmark interest rates (1.5% for the RBA and 1.75% for the RBNZ), but in both cases, the central banks have adopted a dovish tone, meaning they're more likely to cut interest rates next.

By contrast, the US dollar had a decent, middle-of-the-pack day among the major currencies. Make no mistake, the greenback is still the world's reserve currency and the prototypical "safe-haven" asset if the global economic environment truly takes a turn for the worse. That said, the relatively hawkish stance of the Federal Reserve has also prompted the dollar to find support when investors' risk appetite increases as well.

Time will tell whether the global economy evolves as central banks expect. But for now, FX traders may want to reconsider the consensus views of the antipodean currencies as a "risk-on" trade and the US dollar as an automatic beneficiary of "risk-off" trade.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.