Originally posted at forexfactory on Aug 3, 2010
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.