Risk-on vs. risk-off: how to measure the market regime for forex
Safe-haven currencies like JPY and CHF behave differently from AUD and NZD depending on the risk mood. How a risk regime score is built from VIX, credit spreads, the yield curve and the dollar.
Why the regime matters for currencies
In risk-off phases money flows into perceived safe havens such as the Japanese yen, the Swiss franc and often the US dollar. In risk-on phases higher-yielding and commodity currencies such as AUD and NZD tend to benefit.
Building a regime score
A robust regime score combines several independent drivers instead of one indicator: equity volatility (VIX), corporate credit spreads, the slope of the yield curve, equity indices and the broad dollar.
Drift Engine weights nine drivers into a score from 0 to 33 points and shows each driver with its direction, so you can see what is driving the reading.
FAQ
Is risk-off always bad for the US dollar?
No. The dollar often strengthens in acute risk-off phases because of demand for liquidity, but the relationship changes over time.