The US dollar (USD) gains for the second day in a row against the Canadian dollar (CAD). Bulls failed to find acceptance above 1.3700 earlier in the day, but the pair remains bid, trading at 1.3685, with safe-haven USD supporting gloomy market sentiment.
Disappointing quarterly earnings at some major U.S. technology companies, including Google-owned Alphabet, sent the industry reeling, weighing on stock markets around the world. Most European markets show moderate losses heading into the lunch break, although Wall Street futures point to a mixed opening.
Concerns will return on the US labor market
US data released on Wednesday showed mixed data. The U.S. ISM Services PMI showed better-than-expected business activity in January, although a tender employment sub-index and a pointed slowdown shown in the ADP Employment report again highlighted concerns about the U.S. labor market.
In this context, data on the number of applications for unemployment benefits in the US and data on JOLTS job vacancies, which will be published later on Thursday, will be subject to detailed analysis.
There was little economic activity in Canada this week, but lower oil prices are hampering the Canadian dollar’s recovery. The price of benchmark U.S. barrel WTI crude has rebounded from weekly lows but remains more than $2 below last week’s highs of above $66.00, helped by easing supply concerns amid de-escalation in tensions between the U.S. and Iran.
Frequently asked questions on risk sentiment
In the world of financial jargon, two commonly used terms, “risk enhancement” and “risk mitigation,” refer to the level of risk that investors are willing to endure over a given period of time. In a “risky” market, investors are hopeful about the future and are more willing to purchase risky assets. In a “risk-free” market, investors begin to “play it safe” because they are concerned about the future, and therefore buy less risky assets that are more likely to produce a return, even if it is relatively modest.
Typically, during periods of increased risk, equity markets rise, and most commodities – except gold – also boost in value as they benefit from positive growth prospects. The currencies of bulky goods exporting countries are strengthening due to increased demand, and cryptocurrencies are rising. In a risk-free market, bonds rise – 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), Canadian dollar (CAD), New Zealand dollar (NZD) and smaller currencies such as the ruble (RUB) and South African rand (ZAR) tend to rise in risk-off markets. This is because the economies of these currencies rely heavily on commodity exports for their growth, and commodity prices tend to rise during risky periods. This is because investors anticipate greater demand for raw materials in the future due to increased economic activity.
The main currencies that tend to rise during “risk-free” periods are the US dollar (USD), Japanese yen (JPY), and Swiss franc (CHF). The US dollar because it is the world’s reserve currency and also because in times of crisis, investors buy US government debt, which is seen as sheltered because the world’s largest economy is unlikely to collapse. Yen, from increased demand for Japanese government bonds because much of them are held by domestic investors who are unlikely to abandon them – even in times of crisis. Swiss franc because strict Swiss banking regulations provide investors with better capital protection.
