Forex Flash: Still long way till 'risk on - risk off' paradigm over - HSBC

Risk on – Risk off, described as RORO by HSBC, "has been one of the most dramatic features of financial markets since the collapse of Lehman in 2008, a phenomenon of high multi-asset correlations which has caused huge problems for investors forcing them to reassess their investment process" the bank notes.

HSBC adds: "While it is true that correlations have reduced recently, levels are still high. Furthermore, the fall in correlation can mostly be attributed to unusually low levels of volatility rather than to significant changes in RORO dynamics – although some instruments like trade-weighted AUD and soft commodities show signs of more normal behaviour."

The bank emphasizes that "only when RORO betas normalise can we say that the paradigm is over; a sign of this will be when we see much lower correlation than today coinciding with higher equity volatility."

While current market conditions may lead to think that the RORO paradigm might be getting slowly but surely neutralized, HSBC ends its research note by saying that "we have been here before and still have a long way to go."