RORO is not dead, it’s just resting

1

RORO is an abbreviation for Risk On / Risk Off. This has been the mode that characterized trading in the past few years after the crisis. In this mode, there was a high correlation between various assets: good news concerning the global economy (US data, euro crisis news, Chinese indicators, etc.) triggered a rise in stocks, and higher values for “risk assets”: oil, gold and risk currencies: practically every currency apart from the dollar, yen and the occasionally the Swiss franc.

Bad news, such worries about Greece, a Chinese slowdown or weak employment figures from the US, resulted in weakness in risk assets, together with a stronger dollar and strong yen.

* This article is part of the February 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.

See more in: Risk Factor – Explained.

During January, we saw a change: the better atmosphere weakened these correlations and let various currencies trade on their local indicators: the euro strengthened on debt crisis hopes, the pound fell on a new recession, the Canadian dollar dropped on a less-hawkish central bank, the Australian dollar struggled due to domestic weakness and the New Zealand dollar enjoyed optimism about the economy. Even the Swiss franc moved away from the EUR/CHF peg and found more life of its own, even if relatively limited.

Apart from the hopes regarding the European debt crisis, one of the drivers of this move was the release of the FOMC meeting minutes, which revealed that some members see an easing in monetary easing during 2013. If the US leads the world in growth, there is less risk and less “risk on / risk off”.

Are we back to the “old normal”? Not so fast.

The recovery in the US economy remains frustratingly slow and still fragile. We still await the acceleration in job creation which is what the Fed is waiting for. The January Fed decision showed that the committee is still in the hands of the doves.

In Europe, the crisis is still with us, even if it isn’t in the headlines: without growth, it will be hard for the European economies to recover and lower their debt. The higher exchange rate is quite problematic for growth prospects. And regarding China, many doubts were cast about its economic kick start: doubts about GDP and a low official PMI cause worries.

Therefore, it is too early to forget about the RORO correlation. During February, we could see a mix of the “old normal” and RORO, but certainly not a return to the pre-financial crisis characteristics.

Get the 5 most predictable currency pairs

About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

1 Comment

  1. Pingback: RORO is not dead, it’s just resting |