Risk On Risk Off Moves

Risk on/ risk off is a concept recently adopted for the currency markets, to be more exact since the financial crisis started in late 2008. In order for you to understand what it means, just to give you an example, think of the fact that if before the crises, a positive economic data release out of the United States was normally being good for the dollar, meaning the currency will appreciate. And the opposite was true as well. A bad economic release will hurt the dollar. This is not valid anymore.

With the central banks all over the world involved in stimulating their own economies, the concept of risk on/risk off appeared, and this means a correlated move the financial markets is doing at a certain point of time, regardless of the economic data that is being released.

Risk on/risk off is a concertated move of different currencies pairs and equities. In a risk on environment, majors like eurusd, gbpusd, audusd, nzdusd, and equities move to the upside, and the usdcad pair moves to the downside. The opposite is valid as well. In a risk off environment, majors move to the downside, equities move to the downside, and the usdcad moves to the upside.

The reason for such correlated moves is, on one hand, based on the tight connections between the major countries central banks, under the supervision of Bank of International Settlments (BIS = mother of all central banks) and on the other hand the globalisation we are living in making what is happening in China for example to influence heavily the evolution of the audusd pair, as almost one third of the Australian exports go to China, to give you just an example.

On the recording that goes with this chapter I will just right what makes a risk off/risk on move and give you some more examples about the phenomena.