Commodity currencies rose on Tuesday with the Australian dollar soaring to a 10-month high against the U.S. dollar, drawing support from oil prices which stabilized from a slide and underpinned broad risk sentiment.
The Australian dollar AUD=D4 rose to a high of $0.7803 at one point, its peak since last June and up 0.6 percent on the day.
The oil-linked Canadian dollar CAD=D4 also hit its highest since July last year as crude bounced from lows touched on Monday, having come under pressure after major oil-producing countries failed to agree on an output freeze on Sunday.
Brent futures LCOc1 were higher at $43.70 a barrel, holding well above Monday’s low of $40.10. Oil prices had edged higher earlier on Tuesday, supported by a Kuwaiti oil industry strike that has led to a cut in the country’s oil production.
“It is quite amazing how oil prices have recovered from Monday’s lows. That is shoring up risk appetite and pushing up commodity-linked currencies,” said Niels Christensen, FX strategist at Nordea. “As long as oil remains above $43 a barrel we think commodity currencies will remain supported.”
As risk appetite recovered, the safe-haven, low-yielding yen slipped. The dollar was 0.1 percent higher 108.95 yen JPY=, having bounced back from a one-week low of 107.75 hit on Monday. The euro was up 0.2 percent higher at 123.32 yen EURJPY=.
“It seems as if the downside will be limited at least in the short term,” said Teppei Ino, an analyst for the Bank of Tokyo-Mitsubishi UFJ in Singapore, referring to the outlook for the dollar against the yen.
The chances of the dollar falling below its near 18-month low of 107.63 yen set last week seem low for now, especially after the dollar managed to hold above that level on Monday, Ino said.
The yen showed little reaction to news that Japan’s government nominated Takako Masai, an executive at Shinsei Bank Ltd (8303.T) and an advocate of aggressive monetary easing, to join the Bank of Japan’s policy board.
Investors are also cautious about pushing the yen much higher given the threat of intervention and chances that Japan could ease policy further. Bank of Japan Governor Haruhiko Kuroda told the Wall Street Journal the trend in inflation could be affected if the yen continued to appreciate excessively.
Traditionally, interest rate gaps between the U.S. and Japan have been a key driver of the dollar/yen exchange rates, although correlation has weakened considerable in recent months amid a clouded outlook for rates in the United States.
Influential New York Fed President William Dudley, said on Monday that U.S. economic conditions are “mostly favorable” yet the Federal Reserve remains cautious in raising interest rates because threats loom.
Boston Fed President Eric Rosengren, for his part, said the Fed is set to hike interest rates more rapidly than investors currently expect.