risk appetite on - risk appetite off - how it affects the fx market?

Can anyone explain me what "risk appetite is on" term means? I mean, I understand that when on the market risk appetite is on traders are willing to take more risk, but what that mean for Forex market, and why the yen crosses are affected and how?

What is happening with the yen and usd when risk appetite is on?

Useful links for more reading will also do the job. I make a search on Google, but I found only bunch of useless articles...

Thanks in advance to all of those who will help me to understand this subject. I really appreciate it.

Regards, Zoreli

Risk appetite/Risk On = market believes global economy is going to perform well and thus growth is going to be strong, commodities are going to be in demand and people are more willing to put on Risk trades. Risk trades mean people are much more willing to buy up the commodity currencies as they expect interest rates to go up - AUD, NZD, CAD. When risk appetite is present money tends to flow into the carry trades so generally the JPY gets sold and people buy AUD/JPY, NZD/JPY etc. Sometimes with Risk on depending on what the interest rate outlook for the U.S. is the USD gets sold as well. JPY is funding currency but over past few weeks the USD is getting sold as well as the interest rate outlook looks more favorable in GBP, AUD, NZD, CAD etc. Equities tend to rally, emerging markets, commodities do well.



Risk Aversion/ Risk off means the opposite of Risk appetite. People tend to take profits on their risk on trades causing AUD,NZD, CAD to fall. IF people believe the global economy is going to slow then they tend to sell commodity currencies. Sometimes the EUR,GBP will fall as well. Carry trade tends to unwind as well. If there is a full blown crisis aka second half of 2008 and everyone is scared of a global meltdown then the risk aversion happens but on a massive scale as people Buy JPY(carry trade unwinding) and USD (safe haven). Equities tend to drop, emerging markets drop , commodities drop as well.


Hope it helps.

Thanks grkfx!

At least I understand the basics now. Any links for further reading would be appreciated.

Regards, Zoreli

grfx is essentially right.

However, with all correlation trades, the relationship can occassionally break, so be prepared if the relationship doesnt always hold up.

But Risk appetite and Risk Aversion is only seen when the market does some kind of moves? i.e. AUD falls and that means that it is off? Do I getting it right? Or the Risk appetite is calculated is some other ways and could be predicted to be valuable in trading? Because in the first look it seems like Eliot waves are driven by something very similar.

Best regards,
Ignas

Totally overrated and a phrase, it's easy:

Risk appetite on: taking the risk to buy or sell a currency

Risk appetite off:taking profits

Regardless from special currencies.

Some form of risk appetite/aversion is usually seen every day, to a different degree. Sometimes its very small, other times it can be substantial. AUD falling can possibly mean it is off, but not necessarily so. There could be many other reasons for the move to happen. Everything happens in context, with the market sensitive to potentially different things depending on the day.

NZD fell on August 5th, but the rest of the commodity currencies, as well as EUR, GBP, and equity markets held up pretty well. There was some risk appetite on that day, but the NZD still made a 100 pip correction anyways.

I don't know how to calculate risk appetite, like a formula or anything. I usually just take a look at what the equity markets are doing, how sensitive currencies are to the equity fluctuations, why the market is making it's movements and combine that with my own feel for how the market is positioned for each particular currency pair.

Thanks for your reply. I'm just curious, do You use fundamental analysis for your trades?

Best regards,
Ignas

No I don't really use fundamental analysis. I like to know where each country is in the business cycle and stuff like that so I can understand the market environment that I am trading in. But I don't use it for trade entries or exits.

Fundamental analysis usually involves holding trades for long periods of time. I do mostly intraday and swing trading. Very rarely do I hold a trade over a week or two.

By the time your fundamental analysis can turn out to be correct, the market can put you through an emotional roller coaster as the position goes in and out of profit by hundreds of pips. And the problem is that it is difficult to get good entries with fundamental analysis.

Lets say you are fundamentally bullish on AUD/USD back in April 2010. You say ok I will buy some AUD/USD at the lows around 0.9200. Problem is the market eventually caught some global growth jitters and commodity currencies retraced around 1000 pips. How is your fundamental analysis going to account for that? If you got caught on the wrong side of that 3-4 week momentum you got burned probably.

Yeah AUD has finally retraced and is almost back up to the recent highs but are you really going to hold through a 1000 pip retracement? Proper stop placement is very difficult with fundamental analysis. You don't really know if your 500 pip paper loss is a mispricing, and the market will correct itself quickly, or if the market is entering a blow off/capitulation phase and you need to endure a few hundred more pips of pain, or if the fundamentals started to change against your position.

So I don't really care or try to predict where a currency is going to be a few months from now. What I care about is the intraday/swing trading momentum which is far easier to predict and build trading systems around.

What confuses me slightly with the "risk aversion" NFP came out worse than expected US economy is not doing well so that means bad news for the rest of the World so why dont traders sell of risky currencies and buy the dollar?

NFP is worse than expected and the german economy is booming, and you want to buy dollars and sell euros???
If you're looking back in 2008, when the dollar appreciated considerable, you must keep in mind that all economies were in deep shit and it made sense to bet on that which usually recovers faster and has more stamina. Now, some are doing rather good and some worse and the markets react accordingly.

There are times when a "risk aversion" NFP signals weak global growth and you get commodity currencies selling off and the dollar safe haven bid.

Sometimes the market begins to price in the fact that the global economy will continue to grow, just not as fast as it expected, but still no double dip recession/no global financial crisis. In this case the safe haven bid of the dollar diminishes and the currency market starts to focus on interest rate outlook differentials.

So in the past a weak NFP may have gotten the market all scared about another crisis, but in the current market environment a weak NFP means just a weak U.S. economy, meaning the FED is nowhere near raising interest rates, there are even rumours of more Quantitative easing coming out of the FED which are hurting the dollar too.

Now it is possible that at some point in the future the market begins to get scared of global growth and double dip recession jitters and the market will need to reprice itself for that scenario. But currently that is not the case. But this can change on a dime.