Goldman Sachs examination group states: Euro again trades at risk, yen at no risk.
As per Goldman Sachs examination group, using the VIX as a risk estimate instrument, permits to follow the behavior of the currencies within inside the ‘chance on’ – ‘chance off’ casing. Recently the yen has mostly appreciated in ‘risk-off’ periods with a rising VIX, meanwhile the euro has fallen.
While the VIX is based on equity unpredictability, it tends to reﬂect broad ‘risk on, risk off’ across assets. In fact, we ﬁnd similar associations with our cross-asset Risk Appetite Indicator (RAI) – a decrease in risk appetite tends to support the yen and has recently weighed on the euro. While the ‘risk off’ nature of the yen has weakened since the peak at the end of 2015, it still stands out as the key ‘risk off’ currency, both based on the positive connection with the VIX and the negative connection with our RAI. Even gold, which is somewhat similar to a currency, has beneﬁted less from a ‘risk off’ move recently. The Swiss franc has become less ‘risk off’ in recent years.
The euro in contrast has switched between ‘risk on’ and ‘risk off’ since the GFC, driven by political dangers. For instance, amid euro area crisis in 2011/12, European equities were strongly positively correlated with the euro. This is because the euro reﬂected euro area political risks and the potential for a separation of the EMU. This same has been true again more recently with European political risks picking around the UK referendum and the French elections. As a result, the GBP has also been the most ‘risk on’ currency globally in the previous year.