Risk on / Risk off refers to the investment behavior or the classification of investment assets.
When the economy is booming, investors aggressively take risk to invest, buy risk on assets and sell risk off assets. That is risk on.
Whereas, when the economy is in a slowdown or downturn, investors avert risk to invest, sell risk on assets and buy risk off assets. That is risk off.
Prices of risk on assets rise in an economic boom and fall in an economic slowdown. Prices of risk off assets change vice versa.
RISK ON assets are as follows:
- High-interest currencies
- Crude oil futures
RISK OFF assets are as follows:
- Low-interest currencies
- Gold futures
Risk on / risk can be further explained by giving an example of currencies.
Investors buy a high-interest currency like AUD because it gives investors interest. But in an economic downturn, the government cut its interest rates and the price falls. The depreciation of the price causes more drop off. The price of a high-interest currency rises in a boom and falls in a downturn.
The price of a low-interest currency like JPY doesn’t fall in an economic downturn because its interest rate is already low and the government can’t cut much even if it introduced a negative interest rate. Investors who have a high-interest currency sell the high-interest currency and buy a low-interest currency in a downturn. These investors’ move causes an inflation of a low-interest currency.
However, traders buy both bonds and stocks after Brexit. They buy both risk-on and risk-off assets. Something extraordinary happens.