When you’re new to trading, the market can feel like a rollercoaster! One day it’s up, the next it’s down.
A great way to make sense of it all is by understanding the market’s mood, which is known as risk-on or risk-off.
This mood affects which currencies like the New Zealand Dollar or Japanese Yen and assets like gold and stocks and equities are likely to go up or down.
Let’s look at what risk-on and risk-off mean, list the currencies and assets that fit each mood, and show you how to use it to your advantage.
The market’s mood tells us how confident or worried investors are feeling
Risk-On (Happy Market)
When the market is feeling good, investors are willing to take risks. They buy things that do well when the economy is growing, like certain currencies or stocks. This often happens during a rate-hiking cycle, when central banks (like the Federal Reserve in the U.S.) raise interest rates because the economy is doing well.
Higher rates make bond yields go up, which signals a happy market.
Risk-Off (Worried Market)
When the market is worried, investors play it safe. They buy things that feel secure, like certain currencies or gold, and avoid riskier investments. This often happens during an interest rate-cutting cycle, when central banks lower interest rates because they’re concerned about the economy slowing down.
Lower rates make bond yields go down, which signals a worried market.
Understanding the market’s mood helps you decide which currencies or assets to trade. For example, in a happy market, some currencies get stronger, while in a worried market, others do better.
These currencies usually get stronger in a happy market (risk-on) because investors want to earn more interest and are okay with taking risks. They often have higher bond yields, which attract money when the economy is growing.
Australian Dollar (AUD):
Australia’s economy depends on things like mining and trade, which do well when the world is growing. AUD’s 10-year bond yield is 4.444%, which is high, so investors like it in a happy market.
Example: In a happy market, AUDUSD might go up as people buy AUD to earn more interest.
New Zealand Dollar (NZD):
New Zealand’s economy relies on farming (like dairy), which does better when the world is buying more. NZD has the highest 10-year yield at 4.720%, making it a top choice in happy markets.
Example: We’ve seen NZDUSD rise from 0.5700 to 0.5819 recently because of its high yield, but it can struggle in a worried market.
Canadian Dollar (CAD):
Canada’s economy is tied to oil and trade with the U.S., which do well when the economy is growing. CAD’s 10-year yield is 3.016%, which is decent for a happy market currency.
Example: USDCAD might go down in a happy market as CAD gets stronger.
These currencies usually get stronger in a worried market (risk-off) because investors see them as safer places to put their money. They often have lower bond yields, but safety matters more than interest when the market is scared.
Japanese Yen (JPY)
JPY is seen as a safe currency because Japan’s economy is stable, and its 10-year yield is very low at 1.503%. In a worried market, people buy JPY, which makes it stronger.
Example: NZDJPY has been trending down since mid-2023 (from 96.000 to 85.459) because the market is worried, and JPY is getting stronger.
U.S. Dollar (USD)
The USD is often seen as a safe currency because the U.S. economy is one of the biggest in the world. Its 10-year yield is 4.286%, which is high, but in a worried market, safety is more important than interest.
Example: In a rate-cutting cycle, USD might get stronger against NZD, even though NZD’s yield is higher.
These assets usually go up in a happy market (risk-on) because investors are willing to take risks and invest in things that grow when the economy is doing well.
Stocks (Equities)
Stocks, like the S&P 500 (a group of big U.S. companies), go up when the economy is growing because companies make more money. In a rate-hiking cycle, stocks often rise.
Example: During a happy market, the S&P 500 might go up, which can make you think it’s a good time to buy NZD or AUD.
Commodities (like Oil)
Things like oil do well when the economy is growing because people use more energy for things like travel and manufacturing.
Example: In a happy market, oil prices might rise, which can help currencies like CAD since Canada produces oil.
These assets usually go up in a worried market (risk-off) because investors want to keep their money safe instead of taking risks.
Gold
Gold is seen as a safe place to put money when the market is worried. It doesn’t pay interest, but its value often goes up when bond yields fall, like in a rate-cutting cycle.
Example: Gold might rise if the U.S. 10-year yield drops from 4.5% to 4.286%, as it has recently.
Government Bonds
Bonds are loans to governments, and they’re seen as very safe. When people are worried, they buy bonds, which pushes bond prices up and yields down.
Example: In a rate-cutting cycle, more people buy U.S. 10-year bonds, lowering the yield.
Bond yields and interest rate cycles help us understand the market’s mood over the long term
Rate-Hiking Cycle (Happy Market)
When central banks raise interest rates, bond yields go up (like the U.S. 10-year yield rising from 4.0% to 4.5%). This signals a happy market, where risk-on currencies (NZD, AUD, CAD) and assets (stocks, oil) do well.
Rate-Cutting Cycle (Worried Market)
When central banks cut interest rates, bond yields go down (like the U.S. 10-year yield falling from 4.5% to 4.286%). This signals a worried market, where risk-off currencies (JPY, USD) and assets (gold, bonds) do well.
But here’s the tricky part! in a rate-cutting cycle, stocks might still go up because lower rates make borrowing cheaper for companies. This can make you think it’s a happy market, but the bigger picture (falling yields) tells us it’s actually a worried market.
Knowing which currencies and assets are risk-on or risk-off helps you match your trades to the market’s mood
Happy Market (Risk-On)
Buy risk-on currencies like NZD, AUD, or CAD, and expect stocks and oil to go up. Gold might go down.
Worried Market (Risk-Off)
Buy risk-off currencies like JPY or USD, and expect gold and bonds to go up. Stocks might go down, but not always—like in a rate-cutting cycle when lower rates can help stocks.
By looking at both the market mood and the interest rate cycle, you can avoid mistakes. For example, if you only looked at rising stocks and thought it was a happy market, you might buy NZDJPY and lose money. The rate-cutting cycle tells us it’s a worried market, so selling NZDJPY matches the downtrend.
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