Whats a good way to determine risk sentiment of not just traders but the market as a whole?
Listen to them talk about the markets. It’s not scientific, but it helps.
i was thinking along the lines, that if people become risk averse. they move there money out of equities and currency markets and put them in more safe investments.the trouble with reading the news, is that analysts sometimes come across as being fair weather. They give analysis based on the current days trade action.
I.e yesterday i read analysts saying the carry trade was back. Today we saw strengthening in the yen.
when the market’s willingness to take on risk is high in general you are going to see the Yen weaken in relation to other currencies as traders short the yen and buy currencies and other assets where they expect to earn a higher yeild. When traders do this in the currency market by shorting the yen (which has an interest rate of .5%) and going long something like the Pound (which has an interest rate of 5.5%) this is what is known as the carry trade.
Similarly when the market’s willingness to take on risk is low in general you are going to see the yen strengthen as all the people who shorted the yen to buy other assets exit those positions causing them to have to buy back the yen that they sold and therefore causing the yen to strengthen.
You can see this correlation with things like EUR/YEN and comparing this currency pair against the DOW.
Hope that helps.
-fxtrader1979
fxtrader1979’s response is applicable for now - so long as the interest rate differentials stay wide. If you want the real flight to quality fear indicator watch US Treasury’s. The rise in prices (yields drop) when folks get nervous because they pile into the safest thing they can find.
