Risk On Risk Off Currencies – What It Means in Forex Trading?

Most forex traders focus heavily on technical analysis—chart patterns, indicators, and price action. But there’s a powerful, often overlooked element that can significantly improve your win rate: market sentiment. Beyond the lines and numbers on a chart, understanding whether the market is in a “risk-on” or “risk-off” mode can add an extra layer of confluence to your trades. 

So, learning about risk on and risk off currencies can be the magic your trading skills have been waiting for. Here’s what you’ll learn in this article:

• What risk-on and risk-off currencies are and how they behave.
• Examples of key risk-on and risk-off currencies.
• The factors that drive market sentiment.
• How commodities like oil and gold impact risk sentiment in forex trading.

What is a Risk on Risk Off Currency Pair?

The terms “risk on” and “risk off” describe investor sentiment and how it affects the markets, including currency pairs. Risk-on currency pairs tend to appreciate when investors are willing to take on more risk and seek higher returns through risky assets. Conversely, risk-off currency pairs strengthen when investors are more risk-averse and seek safety, often during times of market uncertainty.

For example, during the 2008 Global Financial Crisis and the COVID-19 pandemic, markets shifted sharply from risk-on to risk-off sentiment. In both cases, currencies like the Australian Dollar and New Zealand Dollar, which are tied to riskier assets and commodity prices, weakened as investors moved to safer currencies such as the US Dollar, Japanese Yen, and Swiss Franc. That’s, in short, the explanation of risk-on risk-off sentiment. It essentially refers to the willingness to take risks and, therefore, invest in riskier assets.

Risk Sentiment in Financial Markets – How Does It Work?

Risk sentiment is a critical component of financial markets that reflects the attitude of market participants towards risk.

It is a measure of the willingness of investors to take on risk in pursuit of higher returns. Risk sentiment can be either positive (risk-on) or negative (risk-off), and it plays a significant role in shaping market trends and prices. To analyze the market sentiment, many forex traders use a forex heatmap where they can get a quick view of the strongest and weakest currencies in the market at any given moment.

In a risk-on environment, market participants are optimistic about the economy, and risk sentiment is positive. They tend to invest in riskier assets such as stocks and cryptocurrencies, and prices of these assets tend to rise. On the other hand, in a risk-off environment, market participants are pessimistic about the economy, and risk sentiment is negative. They tend to sell riskier assets and invest in safe-haven assets such as Gold and Silver, and prices of these assets tend to fall.

Risk sentiment is influenced by various factors, including economic data, central bank decisions, and geopolitical events. For instance, strong economic data can boost risk sentiment, leading to a rise in riskier assets. Conversely, geopolitical tensions or disappointing economic reports can dampen risk sentiment, prompting a shift towards safe-haven assets.

In sum, understanding risk sentiment is essential for traders and investors as it provides valuable insights into market dynamics. By keeping a pulse on risk sentiment, traders can make more informed decisions, positioning themselves to capitalize on prevailing trends or protect their portfolios during periods of uncertainty.

Risk-on/Risk-off is a term that refers to investors’ behaviour and willingness to take risks. In a risk-on environment, investors move their fund into risker currencies, while in a risk-off environemnt, the sentiment toward investing in safe-haven assets and currencies.

Key Examples of Risk-On vs. Risk-Off Currencies in Forex Trading 

Different currencies respond differently to changes in market sentiment, depending on whether investors are seeking risk or avoiding it. Risk-on currencies thrive in optimistic, growth-driven environments, while risk-off currencies tend to appreciate during periods of uncertainty or fear. Let’s take a closer look at the key examples from both categories.

Risk-On Currencies

Traders and investors flock to currencies like the Australian Dollar (AUD) and Canadian Dollar (CAD) during periods of strong economic growth and high market confidence.

The AUD, for instance, tends to perform well when Australia’s key exports—like iron ore, coal, and liquefied natural gas—are booming. 

During the commodity surge post-2008 crisis, for example, the AUD gained ground as China and other developing nations ramped up their demand for Australia’s resources. Similarly, the CAD benefits from Canada’s role as a major oil exporter. When oil prices surged in 2021 due to supply shortages, the CAD saw a noticeable appreciation, showing off its risk-on nature.

Other risk-on currencies include the New Zealand Dollar, which thrives when global demand for agricultural exports like dairy, meat, and timber is strong. 

Emerging market currencies, like the Brazilian Real and South African Rand, also fall into the risk-on category. These tend to attract investors seeking higher yields, though they can be volatile, especially when market conditions shift.

Risk-Off Currencies

On the flip side, risk-off currencies are the safe havens people run to when things get shaky. These currencies are backed by stable economies with strong political systems, low inflation, and solid foreign reserves. When uncertainty strikes, investors flock to these currencies to protect their capital.

The USD is the ultimate risk-off currency. Its status as the world’s primary reserve currency makes it a go-to choice in times of crisis. As you can see in the chart below, when things get scary in the markets, the USD value appreciates.

Another major player in the risk-off category is the Japanese Yen. Japan’s large current account surplus and low interest rates make the JPY attractive when investors are looking to unwind risk. Carry trades, where investors borrow in JPY to invest in higher-yielding currencies, are quickly reversed during market turmoil, causing the yen to appreciate. For instance, if there’s economic turmoil in any of the major Asian countries (particularly China), the JPY immediately strengthens versus all currencies.

Another risk-off currency is the Swiss Franc. Since Switzerland is known for its political neutrality and stable financial system, the CHF rallies when global markets are in distress. The European Debt Crisis, for example, saw a surge in the CHF as investors sought refuge in its stability.

And while the Euro isn’t traditionally seen as a risk-off currency, it often behaves like one during regional crises, such as the Russia-Ukraine conflict. Initially, the EUR weakened due to Europe’s reliance on Russian energy, but it eventually stabilized as investors considered the ECB’s response.

Quick Reference: Risk-On and Risk-Off Currency Pairs

Here’s a helpful table summarizing the key currency pairs associated with both risk-on and risk-off environments:

Risk-On Currencies	Risk-Off Currencies
AUD	USD
CAD	CHF
NZD	EUR
BRL	JPY
ZAR	GBP

This table serves as a quick reference for traders looking to align their trading strategies with current market sentiment. As you monitor global economic trends, geopolitical events, or commodity prices, you can use these pairs to position your trades based on whether risk-on or risk-off sentiment is dominating the market.

Factors That Drive Risk On Risk Off Sentiment in the Forex Market

Risk-on and risk-off sentiment doesn’t just pop up out of nowhere—it’s driven by a bunch of external factors, ranging from economic data to geopolitical shake-ups and central bank moves. If you want to keep up with market shifts, you’ll need to understand these drivers.

Global Economic Data

Let’s start with the economic data. In financial markets, economic data refers to statistical measurement of the health of an economy.

Some key economic indicators include the Growth of Domestic Product (GDP), Consumer Price Index (CPI), unemployment rate, interest rates, consumer spending, housing data, building permits, the balance of trade, retail sales, and more. To monitor these indicators, investors must closely watch a daily economic calendar.

One big player here is the Non-Farm Payroll (NFP) report, which is released monthly in the US. This little piece of data can send the markets spinning. 

A strong NFP report is usually seen as a sign of a healthy economy, which boosts risk-on sentiment and lifts currencies like the AUD and CAD. On the flip side, a disappointing NFP report can cause a rush to safety, sending safe-haven currencies like the USD and JPY upward.

External Factors Influencing Risk Sentiment

Beyond the numbers, there are external events that can shift sentiment in a heartbeat. Geopolitical events, like elections, trade disputes, or conflicts, often spark risk-off behavior. Take the Russia-Ukraine conflict in 2022, for example—it pushed investors to safer assets, leading to gains for the JPY and CHF, while currencies tied to risk, like the AUD, lost ground.

Central banks also have a hand in shaping risk sentiment. When central banks signal higher interest rates, that often spells risk-off as fears of slower economic growth set in. 

For instance, when the US Federal Reserve hints at rate hikes, the USD tends to gain strength. On the other hand, when central banks take a dovish stance, like engaging in quantitative easing, risk-on sentiment usually follows. That’s because lower borrowing costs make higher-yielding assets, like the AUD or NZD, more attractive.

Market Liquidity and Volatility

Lastly, we can’t ignore liquidity and volatility. Market liquidity can affect how volatile things get. Low liquidity, like during holidays or major market closures, can crank up the volatility, pushing investors toward safe-haven currencies like the JPY and CHF. In times of crisis, liquidity can dry up even further, making those safe-haven currencies even more desirable.

How Does the Demand for Commodities Impact Risk-On vs. Risk-Off Sentiment?

Commodities are game changers when it comes to shaping risk-on and risk-off sentiment in the currency markets. Why? Because nations that heavily rely on exporting these resources see their currencies rise and fall with the price of the commodities they trade. Let’s break down how this works.

The Canadian Dollar and Oil Prices

When it comes to oil, Canada is a major player on the global stage. The Canadian economy is closely tied to oil exports, which means that when oil prices climb, so does the CAD. For example, during the 2021 oil price surge, oil prices jumped nearly 60%. In turn, the CAD appreciated by about 6% against the USD between January and June 2021, reflecting a clear risk-on sentiment.

But it’s a two-way street. When oil prices drop, so does the CAD, and risk-off sentiment takes over. A perfect example of this was the oil price crash in 2014-2015. Oversupply and weakening global demand drove oil prices down by more than 50%, and the CAD lost around 25% of its value against the USD. 

Traders who closely monitor oil prices can make strategic moves with their CAD positions, going long when oil prices are rising and shorting when they anticipate a fall.

The Australian Dollar and Gold Prices

Australia is one of the world’s largest gold producers, so naturally, the AUD is sensitive to changes in gold prices. Gold is a bit of a wildcard—it acts as both a commodity and a safe-haven asset. This means that its price can rise during both risk-on and risk-off periods, depending on what’s driving the demand.

When global demand for gold increases due to economic growth, the AUD often benefits. Take 2020, for example: gold prices surged by over 25% as investors scrambled for safety during the COVID-19 pandemic. As a result, the AUD strengthened by around 12% against the USD as Australia’s gold exports became more valuable.

However, here’s the twist: gold can also rise during risk-off periods, making it a bit of a lifeline for the AUD when markets are shaky. For instance, in March 2020, as the COVID-19 crisis hit, gold prices spiked as investors sought safety. This helped cushion the AUD from further declines despite the broader risk-off environment.

When gold prices are on the rise, particularly during periods of economic expansion, it’s often a good time to go long on the AUD. But if demand for gold starts to dip, it might be a sign to short AUD pairs.

How to Trade Risk On Risk Off Sentiment in the Forex Market?

So, how can you practically use the risk-on-risk-off sentiment to find trade opportunities and apply a risk management strategy? The forex market, like any other market, is deeply influenced by global risk sentiment, and mastering how this works gives you an edge over traders who chase price movements without understanding the “why” behind them.

But it must noted that trading risk-on risk-off sentiment is not a technique, per see. It is a broader view to analyze the markets, based on a trader’s ability to interpret the risk that investors are willing to take at a given period. Moreover, since many financial news platforms often use the risk-on risk-off sentiment one news and market analysis, it is a must-know concept in trading.

And this is how you should be using the risk-on risk-off – to always be aware of the market sentiment and know ahead of the currencies that might appreciate in any given scenario. Sometimes, this should be enough to make profitable trades.