Risk-on et risk-off: definition
The market's two moods. In risk-on, investors buy risky assets and growth-linked currencies (AUD, NZD). In risk-off, they retreat to safe havens: the dollar, the yen, the Swiss franc.
Two market moods
In a risk-on regime, investors seek yield: equities rise, credit spreads tighten, volatility falls. In risk-off, they protect themselves: they sell risky assets and buy safe havens, and volatility jumps.
How currencies behave
In risk-on, currencies tied to global growth and commodities, such as the Australian or New Zealand dollar, tend to rise, as do high-yield currencies. In risk-off, the yen, the Swiss franc and often the dollar strengthen: they are funding currencies bought back during unwinds, or safe havens.
A pair like AUD/JPY therefore serves as a sentiment thermometer: it rises with risk appetite and falls with risk aversion.
Spotting the regime
A few indicators give the mood of the day: the VIX index of US equity volatility, corporate credit spreads, the direction of the major indices and of long-term rates. When they diverge, the regime is uncertain and the usual correlations between currencies break down.
Frequently asked questions
- Is the dollar a risk-off currency?
- Often, in global crises, because demand for dollars rises. But not always: when the crisis comes from the United States, the dollar can fall. That's the idea of the “dollar smile”.
- What is the VIX?
- An index of the 30-day implied volatility of S&P 500 options. It rises when investors pay more to protect themselves.
This page explains a concept; it is not investment advice. Leveraged currency trading carries a high risk of losing capital.
