When it comes to investing in the market, there are two types of investments – the bond market and the stock market. The bond market is guaranteed by national banks and governments therefore they involve less risk than the stock market. The stock market offers investors larger returns, but their investments are at more risk than the bond market. When an investor's risk appetite grows, they tend to then transfer their interest from the bond market to the stock market. This is known as RISK ON.  

Whenever there is fear in the stock market, and stocks are declining, money is transferred into the safer bond market for investment. The risk appetite of investors has reduced; therefore, this period of the cycle is known as RISK OFF. 

This cycle of interest in risk aversion towards bonds and risk appetite towards stocks has its impact on the Forex market.  

RISK ON

Fund managers that are interested in investing into the stock market want to borrow money at a cheaper rate. For example, if they borrowed the Great British Pound too soon, they would be missing an opportunity to borrow money at a far much lower interest rate. Currently, the three main currencies that are cheap to borrow are JPY (Japanese Yen), CHF (Swiss Franc) and the EUR (Euro). These three currencies can be borrowed and then sold on the Forex market in exchange for USD (United States Dollar) to then buy US stocks. Therefore, the value of the USD will rise, causing a drop on the following currency pairs USD/JPY, USD/CHF, USD/EUR. 

RISK OFF

Risk off occurs when fund managers when to sell their investments in the stock market. After selling their stock positions, they then have USD which they need to sell in exchange for JPY, CHF and the EUR to pay off their original debt. During this period, the USD will drop and the JPY, CHF and EUR will rise in value.  

Commodity Currencies

AUD (Australian Dollar) - Major exporter to China or Iron and Copper.

NZD (New Zealand Dollar) - Major exporter of Agriculture, machinery and mining.

CAD (Canadian Dollar) - Major exporter of oil. 

During RISK ON, there is a larger demand for these particular commodities so these currencies typically rise as there is optimism within the stock market.  

During RISK OFF, with pessimism in the stocks, there will be less demand for these commodities so they will typically decline in value.

Safe-haven currencies

USD, GOLD, JPY, CHF and EUR

These currencies tend to either retain or increase their value during times of uncertainty and instability within the market. These typically tend not to have any correlation with the performances of stocks and bonds. They tend to have certain qualities: Strong, a stable political system, stable finances and general economic growth.  

The JPY is an interesting currency, as the Japanese Yen tends to soar during a risk-off environment, even though the country has the highest debt to GDP (Growth Domestic Product) in the world and a weak financial situation. Did you know that the Japanese Yen even had negative interest rates in 2016? 

The CHF is also known as a safe-haven, even though the Swiss National Bank has intervened to prevent the Franc from becoming too strong.  

RISK ON

RISK OFF