When markets are risk averse and investors are buying treasuries, they use the USD, meaning demand for the USD rises when markets are fearful.
When risk asset markets are retreating, investors fear their capital losses will outweigh any lost return on principal from being in low yielding US treasuries or other top quality government debt like German, Swiss, Swedish or Singapore government debt.
For example, if an investment yields 10% a year but its value drops 15%, the larger capital loss means the investor is down 5% on the year.
This is why investors will crowd into instruments that are most likely to hold their value.
Capital preservation is the priority, not yield.
Here’s a table summarizing how currency markets respond in ‘risk on’ and ‘risk off’ markets
| – | Risk on market | Risk off market |
| US treasuries performance | Prices fall, yields rise | Prices rise, yields fall |
| Investor sentiment & priority | Optimism, investors favor returns over preservation of capital | Pessimism, preservation of capital is priority over maximizing yield |
| Favored currencies | Risk currencies: AUD, NZD, CAD, EUR, GBP | Safety currencies: JPY, USD, CHF |
| Favored currency strategies | Carry trade, long pairs with base currencies that yield more than quote currencies | Short pairs with base currencies that yield more than quote currencies, flight to safe haven currencies |
The implications for binary option traders are clear.
When US bond prices are up (and thus yields down), that is a clear sign to consider buying puts on risk assets and calls on safe haven assets.
Leave a Reply