Is an end in sight to risk-on, risk-off forex rallies?

The U.S. dollar has been the currency haven of choice when the world goes through a convulsion of fear with risk-associated currencies such as GBP taking a hit. But the dynamics of the forex market could be about to shift or at least go through a period of confusion.

Risk-on, risk-off waves of sentiment have become a familiar scene across currency and asset markets. As a crisis threatens to move toward an ugly climax central banks rush for the fire hydrants to quell the flames and trigger a relief rally in risk currencies and assets in the process.

The IMF has documented the process in a working paper called “The Behaviour of Currencies during Risk-off Episodes.” Specifically looking at high yield emerging market currencies it remarked that since the global financial crisis, those currencies have depreciated more sharply during risk-off episodes.

The IMF noted that this is in contrast to the pre-global crisis world of 2007 where they tended to depreciate vs. the USD during risk-off episodes. Post-2007, buying volatile currencies as the market shifts to a risk-off phase has proved to be a profitable trade. But there are a number of factors afoot, which might challenge this now rather familiar dynamic, even if it's only temporary.

USDTRY daily chart

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