Risk-Aversion Remains High as Iran Likely to Attack Israel
The Japanese Yen continues to rally on safe-haven flows, causing the Australian Dollar to suffer. The AUD/JPY pair experienced a sharp decline in the European session on Monday, dropping to its lowest level in 15 months at 90.16 before bouncing back to near 92.00.
Market sentiment has shifted to ‘sell everything’ mode due to concerns over a potential conflict between Iran and Israel. US Secretary of State Antony Blinken’s warning of a possible attack by Iran and Hezbollah on Israel has heightened tensions, leading to increased risk aversion in the financial markets.
Additionally, fears of a US recession have emerged following a disappointing employment report. This, combined with escalating Middle East tensions, has boosted demand for safe-haven assets like the Japanese Yen, resulting in significant losses for the AUD/JPY pair.
The diverging monetary policies of the US Federal Reserve and the Bank of Japan have also supported the Yen’s strength against the Australian Dollar.
Although the Aussie briefly benefited from positive China’s Caixin Services PMI data for July, the overall demand for safe-haven assets has weighed heavily on the AUD/JPY pair.
Traders are closely monitoring developments in the Middle East and await the Reserve Bank of Australia’s policy announcements for further direction.
Risk Sentiment FAQs
Risk-On vs. Risk-Off Markets: In a “risk-on” market, investors are optimistic and willing to take risks, while in a “risk-off” market, investors prefer safer assets.
Market Behavior: During a “risk-on” period, stock markets and commodities tend to rise, while safe-haven currencies like the Japanese Yen strengthen in a “risk-off” environment.
Impact on Currencies: Commodity-based currencies like the Australian Dollar tend to perform well in “risk-on” markets, while safe-haven currencies like the US Dollar and Japanese Yen thrive in “risk-off” scenarios.
Understanding these market dynamics can help investors navigate volatile situations and make informed decisions about their portfolios.