Reserve Bank of Australia Hikes Interest Rates

The Reserve Bank of Australia announced another rate hike of 25 basis points, and insisted that it will be making more rate hikes soon. The RBA has been hawkish lately, pointing out that as demand from China increases, the economy is picking up Down Under.

However, the Aussie did not see a hugely positive reaction to the move. It was expected, and there are other issues at play today that are limiting the risk trade. On top of that, Aussie officials' accompanying statement indicated that they are looking for a little two-way action.

GFT's Kathy Lien points out what is likely in FX360:

Part of the reason why the Aussie sold off after the release is because the RBA said the recent appreciation of the exchange rate "is likely to constrain output in the tradeables sector and dampen price pressures." In other words, the want to add some two way action in the Aussie by letting the market know that they are keeping a close eye on their currency.

Risk Appetite Returning to the Currency Market

For now, risk appetite is making a comeback on the currency market. Indeed, the risk trade is gaining popularity in forex trading as it appears that the Fed will keep U.S. rates steady, and as further evidence supports the idea that economic recovery is on its way.

GFT's Boris Schlossberg reports in FX360 on the interest in the risk trade in forex trading:

Risk currencies rallied throughout the Asian and European session helped by better than expected data out of UK firmer equity prices and further gains in gold  which reached another record high of $1093/oz. Asian and European bourses tacked on gains as global economic data continued to show steady improvement. Yesterday’s US auto sales which came in at 10.2 million annual run rate suggested that consumer demand appears to have stabilized lending further credence to the recovery trade.

Yesterday's risk aversion, which helped strengthen the U.S. dollar, appears nowhere today. Instead, investors are optimistically looking for better returns, and waiting for further news that things are improving.

Things could turn around, though. Volatility remains relatively high, and the goodwill everyone feels today could dissipate by tomorrow. But for now, the risk trade is alive and well in forex trading.

U.S. Unemployment Hits 10%

Today, the release of non-farm payrolls has been the highlight of the week. Everyone has been waiting to see what they would show, since employment is a huge indicator for the economy. And there had been hopes of an improvement. However, with the latest loss of 190,000 jobs, the unemployment rate has risen to 10.2%.

Indeed, this week's job losses bring the total since the beginning of the recession to 7.3 million. Additionally, the fact that the unemployment rate broke through 10% is also big news. Some economists have been saying that such a level has been likely since the beginning of the recession, and many have said that we won't see a turnaround until after unemployment as reached 10%. MarketWatch offers this additional look at the jobs picture:

An alternative gauge of unemployment, which includes discouraged workers and those forced to work part-time, rose to 17.5%, the highest on record dating to 1995.

Total hours worked in the economy fell 0.2%. The average workweek was steady at a record-low 33 hours. Average hourly earnings rose 5 cents or 0.3%, to $18.72. Average hourly earnings are up 2.4% in the past year.

This new unemployment level also has other implications for the economy. With unemployment so high, it is likely that consumer spending will likely remained curbed, and that we will see more difficulties in the housing market as those who continue to lose their jobs find it hard to make mortgage payments.

As a result, it is little surprise that risk aversion is setting in, and the U.S. dollar is starting to rally again.