Experienced traders will remember how things were a few years ago when markets were much simpler.
For a period, when the Fed was considering tapering its asset purchases, it seemed like every day was either a "risk on" day, where stocks, higher-yielding currencies and commodities rallied in sync, or a "risk off" day, where bonds, gold, the dollar and the Japanese yen led the way. Because these moves relied on handicapping the likelihood of continued Quantitative Easing from the Fed, they often were driven by counterintuitive causes; for instance, ostensibly "good" economic news (say, from a strong U.S. jobs report) would typically lead to a risk-off day because it made the U.S. central bank more likely to end its QE program, whereas "weak" economic figures could actually increase the market's risk appetite because it meant that the liquidity spigots continued to flow full bore.
While we have hardly returned to those simpler times, this weekend's French election was as close to a pure "risk on" event as we've seen in awhile. As expected, centrist Emmanuel Macron advanced to the second round vote scheduled for May, as did Eurosceptic Marine Le Pen. Many traders fear that a Le Pen victory would throw the region into turmoil, but that outcome seems far less likely after Le Pen underperformed her polls and the other candidates immediately threw their support behind Macron, in some cases before the votes were even fully counted.
Investors cheered the outcome, with major stock indices surging by over 1% across the globe and safe-haven assets like gold, the Japanese yen, and bonds all falling. On the volatility front, the VIX, a measure of expected volatility in U.S. stocks, fell by nearly 25% to below 11, its largest 1-day percentage drop since 2011.
Though many markets followed the risk on script, there was a pair of interesting outliers in the forex market: both the Australian and New Zealand dollars had relatively lackluster days yesterday. Both currencies are supported by central banks with relatively high benchmark interest rates (1.5% for the RBA and 1.75% for the RBNZ), but in both cases, the central banks have adopted a dovish tone, meaning they're more likely to cut interest rates next.
By contrast, the U.S. dollar had a decent, middle-of-the-pack day among the major currencies yesterday. Make no mistake: the greenback is still the world's reserve currency and the prototypical "safe haven" asset if the global economic environment truly takes a turn for the worse. That said, the relatively hawkish stance of the Federal Reserve has also prompted the dollar to find support when investors' risk appetite increases as well.
Time will tell whether the global economy evolves as central bank's expect, but for now, forex traders may want to reconsider the consensus views of the antipodean currencies as a "risk on" trade and the U.S. dollar as an automatic beneficiary of "risk off" trade.