Question8 During periods of global financial market stress, the AUD/USD exchange rate typically falls sharply. The primary reason is: Investors flee to safe-haven currencies such as the USD, reducing global demand for risk-sensitive currencies like the AUD The Reserve Bank of Australia deliberately weakens the AUD during crises to support export-oriented industries Australia's current account surplus collapses during global recessions, removing a key source of AUD demand Australian inflation rises sharply relative to US inflation during crises, eroding the AUD's purchasing power ResetMaximum marks: 1 Flag question undefined

Question

BlackTom AI · Accepted Answer

Investors flee to safe-haven currencies such as the USD, reducing global demand for risk-sensitive currencies like the AUD

1. Relevant knowledge points and concepts
- Safe-haven currencies: In times of global financial stress, investors prefer liquid, low-risk assets (US dollar, US Treasuries, Swiss franc, Japanese yen), causing demand for those currencies to rise.
- Risk-sensitive currencies: The Australian dollar (AUD) is considered risk-sensitive because Australia’s economy and financial markets are closely tied to global commodity demand and investor risk appetite.
- Carry trades and liquidity: AUD often finances carry trades because of historically higher yields; during stress these trades are unwound, forcing AUD sales.
- Commodity link: AUD tends to track commodity prices (iron ore, coal); global slowdowns reduce commodity demand, further weakening AUD.

2. Step-by-step reasoning
- Global stress increases perceived risk and uncertainty.
- Investors move capital into safe-haven assets, increasing demand for USD and reducing demand for riskier currencies.
- Positions in AUD are reduced or sold (including forced unwinds of carry trades), increasing supply of AUD in FX markets.
- Reduced commodity demand and falling Australian asset prices amplify selling pressure on the AUD.
- The combined higher USD demand and greater AUD supply cause AUD/USD to fall sharply.

3. Calculations
- No numerical calculation is needed; the mechanism is qualitative (supply/demand shifts). If represented: AUD/USD ∝ (Demand_AUD / Demand_USD). Stress reduces Demand_AUD and raises Demand_USD → AUD/USD decreases.

4. Why the correct answer is correct
- It directly captures the primary market mechanism: flight-to-quality to the USD and de-risking reduce demand for the AUD, explaining the sharp fall in AUD/USD during crises.

5. Why the other options are incorrect
- RBA deliberately weakening AUD: Central banks rarely target weaker FX in crises; RBA normally focuses on domestic monetary policy and does not systematically devalue its currency during global stress.
- Current account surplus collapses: Australia normally runs deficits or small surpluses depending on commodity cycles; a collapsing surplus is not the primary immediate driver of AUD falls in crisis.
- Australian inflation rises sharply relative to US: Crises typically reduce demand and inflationary pressure, not cause a sudden relative spike in Australian inflation.

6. Conclusion
The correct answer is the first option: investors flee to safe-haven currencies such as the USD, reducing demand for risk-sensitive currencies like the AUD—this matches the provided answer.

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