Understanding Risk Sentiment

“Risk-on” and “risk-off” are two terms used to explain how investors feel. “Risk-on” means investors are feeling good and are willing to take risks with their money. In these times, currencies like the Australian Dollar, Canadian Dollar, and New Zealand Dollar usually get stronger. On the other hand, “risk-off” indicates that investors are being cautious and prefer safer investments, leading to stronger currencies like the US Dollar, Japanese Yen, and Swiss Franc. With the likely end of the US government shutdown, the market is shifting into “risk-on” mode. Stock futures are rising, reducing the need for safe-haven assets. This change in sentiment is why the US Dollar is currently weaker against many major currencies. This situation opens doors to trading volatility. Historically, during government shutdown resolutions in 2018 and 2019, the CBOE Volatility Index (VIX) dropped sharply once political stability returned. We should think about selling VIX futures or buying puts on volatility products, anticipating a decline after the high volatility seen in recent weeks. The US Dollar Index is currently around 99.60, which is much weaker than the range of 104-106 it traded in for most of 2024. This suggests a general downward trend for the dollar. With the shutdown ending, the dollar loses a key support pillar, so we can expect currency pairs like EUR/USD to move higher. Buying call options on the Euro could be a smart move to benefit from the expected dollar weakness.

Capitalizing on Gold Trends

Gold’s rise to nearly $4,075 is a significant indicator, as it is gaining strength despite the risk-on mood. This suggests that underlying fears, likely from ongoing inflation since early 2020, are still present. As a result, we should keep some long gold positions, perhaps through futures, to guard against these economic concerns. In Japan, the Bank of Japan’s decision to possibly delay a rate hike until 2026 keeps the Yen weak. This difference in monetary policy reminds us of the factors that pushed the USD/JPY to around 160 back in 2024. Thus, buying call options on USD/JPY seems like a smart strategy to take advantage of the interest rate gap. Create your live VT Markets account and start trading now.

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