Risk on and Risk Off Situations – Things to Know About the Currency Market
There are times of uncertainty, they come around every now and then. Just recently, there was this whole situation with Ukraine and Russia that captured the eyes of the world. When market switches from risk on and risk off sentiment takes over investors usually back away from risky investments and prefer buying safe haven currencies such as the Japanese yen and Swiss franc. However, in situations otherwise, the Japanese yen (JPY) and the Swiss Franc (CHF) are weak or neutral currencies. The US Dollar (USD) is also one of these safe haven currencies but still will dwindle against the Yen and swiss franc in these conditions.
Understanding Risk on and Risk off sentiment
The market is full of participants, traders that are investing and taking risks day in day out. Risk on and Risk off reflect the mood of these traders or their sentiment with regards to taking a risky investment into their portfolio or not. These sentiment transitions take place in the market as per events that have such effects on global economy. Risk Appetite
This is when traders believe that the global economy is healthy and improving and the idea of taking a risk seems appealing to make a profit. They take risks in currencies like the Euro (EUR), Great britain pound (GBP) and other commodity currencies such as the New Zealand Dollar (NZD), Australian Dollar (AUD) and the Canadian Dollar (CAD) as well as other currencies. Since there is positive sentiment in the market, traders are more inclined to take these risky investments as they see a higher probability of making a profit from these investments.
This is when traders believe the economy could worsen and are not interested in taking a risk, they then prefer safer forms of investments. These events can be any times of insecurity or even time of war. Anything that threatens global economy growth or pushes it back causes market sentiment to go from positive to negative. These events are triggered by natural disasters as well as other reasons.
Well Japan is the largest creditor in the world, followed by China, Germany, Saudia arabia and Switzerland. Out of these the currencies for Saudia Arabia and China are either pegged or can’t be converted. The currency germany has is linked with a lot of other nations and is not as strong considering. This leaves out these two currencies, the Japanese yen and the Swiss Franc. Other than these safe haven currencies traders usually head back to the US Dollar and also invest in precious metals, like Gold (XAUUSD) and Silver (XAGUSD).
Are risk off investments risk free?
No investment no matter what you put your money into is going to risk free. It is important to understand that Gold is used as a hedge against inflation and can be kept for times of economic instability but otherwise is a risky investment, the same goes for Silver as it moves in correlation with Gold. The swiss franc is pegged with the Euro at 1.20, so that means that the Euro/Swiss Franc (EURCHF) cannot go below 1.20, which slows down its expected appreciation, however, you never know when this peg is removed and how the market reacts to it and when but until it’s there, you can sure trade it. Knowing your risks and trading according to them is the best way a trader can operate and be profitable in the long run.
How to analyse the market sentiment
The best indicators to look at to see if market is going into risk off mode is to look at the Yen and Oil. If you see a lot of yen strength you can always check out the headlines to see if something on the ticker tells you why that is. You can also look toward Crude oil to spikes to highs. The price of oil itself going higher effects global economy as it would affect GDP globally.
I hope this helps you identify risk on and risk off sentiments in the Forex market.
If you have any other indicators or any methods of reading these sentiments in the market, feel free to share in the comments.