Inter-market analysis: Risk back in vogue, but for how long?

Risk appetite has seen a marked improvement since the last disappointing US Non-Farm Payrolls on Friday, which has resulted in a significant adjustment lower in both gold and the Japanese Yen, two of the most sensitive assets to these type of short term 'risk on/off' flows.

VIX, Yen, Gold underpin risk on environment

After a rise up to May 4th, the VIX index has moved back down from circa 16.00 points to currently stand close to the lowest it's been in 2016 at 13.50, nearly the same depressed levels as back in early April. The lower VIX coincides with a temporary bottom found in USD/JPY on April 29th, with a fairly steep appreciation back above 109.00 handle ever since. Gold has also been rejected from the $1,300 to presently rest at $1,265.00, further cementing the notion of the 'risk on' environment.

RORO is back driving the currency market

In order to trade current market conditions and understand what currencies may benefit or suffer the most based on the market profile we are in, it is critical to constantly assess the type of environment we are surrounded by. In a recent research note from HSBC, it noted "Risk on – risk off (RORO) is back", implying that current conditions are being driven once again by these type of short term flows.

HSBC notes: "In the years since the 2008 financial crisis, markets have been dominated by global forces, with local differences playing a secondary role. RORO (risk on / risk off) was the most notable of these, with its impact peaking between 2010 and 2013. As QE became an increasingly important driver of markets, RORO’s influence started to wane. However, this shift has reversed in 2016: At the start of the year, concerns over the Fed hiking cycle, falling oil prices, and Chinese growth led to a big risk-off move. As these worries have receded, markets have flipped to risk-on. RORO has returned. Risk on – risk off is once again the single most important driver of markets."