What forex pairs to watch when risk increases

Key points

• VIX, a widely used fear gauge, has recently returned to 4-month highs
• USD and JPY have historically been flight-to-quality assets
• Traders may look to AUD/USD for risk-on / risk-off positions

The S&P volatility index, VIX, has hit highs this month last seen in May. The index is commonly known as a fear gauge for US stocks as it measures uncertainty in the S&P.

What are risk-off assets?

Risk-off assets are investment vehicles that tend to appreciate when risky assets like stocks are declining. Traders tend to move towards "safer" assets in times of uncertainty in attempt to avoid large losses. Examples of risk-off assets include gold, bonds and certain currencies.

US dollar and Japanese yen are historically seen as flight-to-quality or safe haven currencies that hold strong in times of fear and added volatility. Strong liquidity and stable political systems are common factors that give traders reason to believe in a currency's stability.

Given the current economic landscape, USD and JPY have different potential draw factors as safety currencies. The US has a strong economy with recent dollar strength, though any indication of a recession in the near future may seep into USD rather quickly. Japanese yen has been weak in 2023, though its distance from involvement in the war in Israel so far could leave its currency more immune to global events.

Traders may also look to AUD/USD given its historical correlation to the S&P 500. Long Australian dollar currently has a positive 0.5 correlation with the S&P, with hardly any negative correlation over the past 10 years. Following this line of reasoning, long USD in AUD/USD would be a risk-off strategy, while long AUD in AUD/USD would be risk-on.

How to trade AUD/USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on AUD/USD

Trading forex requires an account with a forex provider like IG. AUD/USD can be found in IG's platform under the 'Major' pairs tab. Many traders also watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s Trading Academy. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.