What on Earth does Risk-On / Risk-Off Mean?

If you have been hearing people say things like "The market is in risk-on mode today" and you have no idea what the hell they are on about, then read this.

TLDR: Risk-On means that in general, the winds are fair for the market. Market participants feel that there is no real bad news around, economies are running along quite nicely, thank you. Risk-Off means there is either some nervousness or even a panic.

When looking at the equity market's Risk-On / Risk-Off status, amazingly, people look at the major currencies for the clue. This may not seem intuitive, but here's why:

There are 8 major currencies. Some of them are "commodity currencies". These are CAD (Oil), AUD (minerals mining) and NZD (foodstuffs). When the world economy is rockin', these states to sell and their tax receipts go up, and the rest of the world needs to own their currency to buy their goods. So, their currencies appreciate. Also lumped in with them (certainly for me) is GBP, as the United Kingdom sells services to the world like accountancy, and these services are in more demand when the world is in good shape.

So, that gives 4 major Risk-On currencies. There are also 4 Risk-Off currencies. USD, JPY, CHF and (more and more) EUR.

These 4 are seen as "reserve" currencies, "safe havens" in a storm, especially USD. When the smelly stuff hits the fan, nervous people sell their CADs and AUDs etc and run for safety. All the safe currencies rally and the commodity currencies sag. Take a look at March 2020, Pandemic hits:


Equities traders running around with their pants on the heads, and the "reserve" currencies rally.


The indicator used in this chart is freely available in my profile. It might be used to indicate the overbought or oversold nature of the two sets of currencies, to help index and equities traders.