3 April 2020

FX Viewpoint Currencies
Global

The current dominant driver of FX

 Risk On-Risk Off (RORO) is still the dominant force for FX

 As such, markets are paying relatively less attention to the
differences amongst various policy responses at the moment
 The USD and JPY should continue to outperform ‘risk-on’
currencies in a ‘risk-off’ environment, in our view

The Risk On-Risk Off (RORO) phenomenon is back with a bang. Our RORO RORO phenomenon dominates,
indicator has spiked to an all-time high (Chart), easily surpassing the levels seen with our RORO indicator
even at the peak of the Global Financial Crisis. This means that a much wider range surging to an all-time high
of financial market assets are moving in a closely correlated manner and are being
primarily driven by one specific factor, i.e., risk sentiment.

RORO indicator surging to all-time highs

0.6 0.6
HSBC's RORO indicator

0.4 0.4

0.2 0.2

0 0
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Source: Bloomberg, Refinitiv Datastream, HSBC

The dominance of the RORO factor also suggests that markets are paying
relatively little attention to the differences amongst the various policy There was a global rush for the
responses delivered in the last few weeks. In March, policymakers across the USD as risk-off sentiment
globe scrambled to mitigate the adverse economic impact of COVID-19 and the intensified, which saw the
shutdowns, with some measures unprecedented in nature. The Federal Reserve sharp and broad rally in the
was the most aggressive of the G10 central banks, cutting rates early and in size, as USD in March
well as embarking on a new unlimited quantitative easing (QE) programme, while the
White House also passed a USD2trn stimulus package. The US Dollar Index (DXY)
ended 0.9% higher in March (source: Bloomberg), as the flight to USD safety
overwhelmed the potentially negative impact of looser US monetary and fiscal policy.
Markets are skittish at the moment. What matters appears to be the binary nature
of COVID-19 and the economic fallout from the spread of the virus. If markets
The USD and JPY should
still think things are getting worse, then we will be firmly in ‘risk-off’ territory.
continue to outperform ‘risk-on’
Occasional flurries of ‘risk-on’ sentiment have been seen on certain policy steps. It is
currencies in a ‘risk-off’
hard to see why this RORO backdrop would change any time soon, in our view.
This means the USD and JPY should continue to fare well, while currencies of environment, in our view
smaller open economies – the AUD, NZD, GBP and many EM FX – will continue to
struggle in a ‘risk-off’ environment.
 Currencies ● Global
3 April 2020

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1 This report is dated as at 03 April 2020.
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2
 Currencies ● Global
3 April 2020

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