Most Volatile Forex pairs

MOST VOLATILE FOREX PAIRS

 

Volatility is a forex term used to measure to what extent market prices fluctuate upwards and downwards in a particular time period. Volatility is also associated with risk. Volatile currency pairs experience dramatic upswings and downswings while less volatile currency pairs experience smaller, incremental price movements.

You’ll hear forex traders talking about high volatility or low volatility and that relates to how far an asset’s value deviates from the average. In other words, volatility is a measure of standard deviation.

Forex trading risk increases with volatility but volatility is also good news for forex traders because it increases opportunities for trades and to make profits.

The most important decision you make as a forex trader is which currency pairs to trade. Your decision is based on your trading strategy and your appetite for risk. Before choosing currency pairs to trade and opening a position, you need to know more about its volatility and what you need to do to protect yourself from financial loss.

 

Most volatile currencies in the forex market

The most volatile currencies on the forex market are the exotic currencies which move on average more than 400 points per day. Exotic currencies aren’t desirable to forex traders and volumes traded are generally very low, mainly because they are illiquid and risky.

However, exotic currencies are not necessarily weak or soft currencies. They are mostly the currencies of emerging or developing countries on continents like Africa, the Middle East, Asia and the Pacific. These countries typically have small but strong economies.

 

Exotic Currencies

Examples of exotic currencies include:

  • SEK Swedish Krona
  • TRY Turkish Lira
  • BRL Brazilian Real
  • HUF Hungarian Forint
  • ZAR South African Rand
  • CZK Czech Koruna
  • MXN Mexican Peso

 

Exotic currencies are more popular among forex traders who like to trade on volatility. Rapid price fluctuations lead to dramatic highs and lows in the currency values and this presents volatility traders with excellent opportunities to make profits (and losses).

Exotic currencies generally demand higher spreads to protect traders from unfavourable fluctuations. The spreads are far higher for exotics than they are for major and minor currencies.

 

  • AUD/USD
  • USD/ZAR
  • GBP/EUR
  • GBP/AUD
  • AUD/JPY
  • NZD/JPY
  • CAD/JPY
  • USD/BRL
  • USD/TRY
  • USD/MXN

 

AUD/USD

The Australian Dollar (AUD) and US Dollar (USD) is possibly one of the most popular currency pairs to trade because of the interest rate differential. The latter is the difference in interest rates between two securities. Australia is a developed nation and has one of the highest interest rates.

AUD/USD is the preferred currency pair for carry trades which is one of the most popular trading strategies in the forex market. Carry trades involve a forex trader selling a currency with a relatively low interest rate while buying one with a higher yield. Carry traders make a profit (or loss) from the difference in interest rates.

 

USD/ZAR

The US Dollar (USD) and South African Rand (ZAR) is a highly volatile currency pair, largely due to dramatic price movements in gold. South Africa is a major exporter of gold and gold exports are always fixed to the USD.

Apart from gold, factors that affect the stability of the country relate to political and economic upheaval which affects interest rates, GDP growth, unemployment rates, inflation and balance of payments.

To trade USD/ZAR, you need to keep an eye on the gold market and any news on political and economic upheaval in the country that affects global market sentiment.

 

GBP/EUR

The Great Britain Pound Sterling (GBP) and the Euro (EUR) have always been a desirable currency pair and it usually falls into the list of least volatile currency pairs. However, volatility in this pair has increased in recent years due to the ongoing controversy over Brexit. Of the two currencies, the British Pound has been more volatile.

When the hype around Brexit abates and relationships between the two great economies stabilise, there should be less volatility in this currency pair. Follow the news relating to Britain and the Eurozone in your fundamental analysis if you’re looking for opportunities to trade GBP/EUR.

 

GBP/AUD

The Great Britain Pound Sterling (GBP) and Australian Dollar (AUD) is another popular currency pair to trade because of its volatility characteristics. The volatility arises largely from Australia’s dependence on commodity trading and its capacity to export its four major commodities; iron ore, gold, petroleum and coal.

Australia has born the brunt of the ongoing trade war between the United States and China, losing out on significant export revenue because China is a major trading partner of Australia. China also imports a load of other commodities from Australia such as cars, wine, woold and grains as well as aircraft and electronic parts.

Trading this volatile currency pair relies on you keeping track of the strength of China’s economy and how international relationships between the US and China play out.

 

AUD/JPY

The Australian Dollar (AUD) and the Japanese Yen (JPY) is one of the most volatile currency pairs. This is largely due to the dichotomy of the two nation’s economies and trading environments.

The AUD is heavily linked to commodities and the country’s capacity to export minerals and metals. Agriculture plays a small role in the value of the currency.

The JPY is heavily linked to technology. It’s the third-most traded currency in the forex market and considered to be a safe-haven currency in a Bear market, along with the US Dollar (USD) and the Euro (EUR).

Despite the JPY serving as a safe-haven currency, it remains volatile for a few reasons. As the main funding currency for Asia, it is vulnerable to geopolitical turmoil, expanded stock market ranges and a persistent threat of stimulus interventions by the Bank of Japan.

 

NZD/JPY

The New Zealand Dollar (NZD) and the Japanese Yen (JPY) is another example of a volatile forex pair. Much like Australia, New Zealand is dependent on its capacity to export commodities. This mostly includes diary products, honey and wood. Again, Japan is linked to technological advancements and is the second-largest developed economy in the free market.

Changes in commodity prices affect the NZD. Keeping a check on commodity price movements relative to the stability of the Japanese Yen helps forex traders identify opportunities for successful forex trades.

 

CAD/JPY

The Canadian Dollar (CAD) and Japanese Yen (JPY) currency pair have similar characteristics to the AUD/JPY. Canada is a major exporter of crude oil and is heavily reliant on its capacity to trade this valuable commodity. Japan also exports crude oil and thus, the two are set off against each other.

If the price of crude oil moves drastically, it becomes costly to buy Canadian Dollars with Japanese Yen. This is because more JPY is needed to be converted into CAD to buy a barrel of oil.

Of the two, the JPY is a more reliable and stable currency and serves as a safe-haven currency. Forex traders looking for forex trading opportunities in this currency pair keep an eye on what is happening to crude oil prices.

 

USD/BRL

The US Dollar (USD) and Brazilian Real (BRL) currency pair is a classic example of a major currency paired with an exotic currency. Exotic currencies are notoriously volatile and are affected by many factors that characterise an emerging market.

The BRL is officially a free-floating currency. It replaced the Cruzeiro Real in 1994 and by 2016, was the 19th-most traded currency in the world by value. Brazil’s top trading partners are the US, China, Argentina, the European Union and Japan.

Local policy factors play a role in the value of the BRL but the currency is particularly sensitive to changes in the United State’s interest rates. The latter influences foreign investment in emerging markets. If you’re trading USD/BRL, keep an eye on what is happening with the US interest rate and market sentiment regarding investment in emerging markets.

 

USD/TRY

The US Dollar (USD) and Turkish Lira (TRY) is not a popular currency pair but if you have an appetite for volatility and risk, it does present some interesting trading opportunities.

The TRY is very volatile and its value against the USD has fluctuated dramatically over the years. This is largely due to political and economic upheaval in the country, including contentious elections and coups.

 

USD/MXN

The US Dollar (USD) and Mexican Peso (MXN) is a notoriously volatile forex pair. The relationship between the US and Mexico has been turbulent since the 2016 US elections but the tariffs on Mexican exports that were implemented recently has made the currency pair even more volatile.

 

The safest currency pairs to trade for beginners

 

  • EUR/USD Euro/US Dollar
  • GBP/USD Great British Pound Sterling/US Dollar
  • NZD/USD New Zealand Dollar/US Dollar
  • AUD/USD Australian Dollar/US Dollar
  • USD/JPY US Dollar/Japanese Yen
  • NZD/USD New Zealand Dollar/US Dollar
  • AUD/USD Australian Dollar/US Dollar

 

The major currency pairs are generally the least volatile. This is because they represent the largest world economies and are the most liquid. The more liquid currency pairs have less volatility and greater trading volume. That in itself creates greater price stability.

 

EUR/USD

The Euro and US Dollar currency pair is regarded as the easiest pair to trade as a beginner trader. It’s one of the most stable currency pairs which is why it’s so popular with professional traders. The EUR/USD is renowned for offering tight spreads and high liquidity.

 

Least volatile currency pairs

 

  1. EUR/USD Euro/US Dollar
  2. USD/JPY US Dollar/Japanese Yen
  3. GBP/USD Great British Pound Sterling/US Dollar
  4. USD/CHF US Dollar/Swiss Franc

These four currency pairs are regarded as the least volatile on the forex market. They are highly liquid currency pairs which means they are easy to offload quickly in a Bear market.

All four currencies are considered to be safe-haven currencies. In volatile market conditions, forex traders and investors will likely convert cash held into these currencies to protect themselves.

 

US Dollar (USD)

The USD retains its status as a safe-haven currency largely due to how reliable the US Treasury is in paying its investors. In times of political upheaval and financial crisis, it’s common practice to offload higher risk financial instruments and revert to US Treasuries and the US Dollar.

The USD is the default safe-haven currency in times of political and economic upheaval and currency uncertainty. It’s the world’s reserve currency and the denomination for the majority of international business deals.

 

Euro (EUR)

In recent years, the EUR proved to be a safer haven than the USD during economic and financial crisis. This was largely because the low interest rates in major European economies created heightened expectations.

However, with current negative sentiment surrounding Brexit, the EUR is not as bullish as it could be and investors are inclined to lean towards the USD and JPY while the negotiations play out.

 

Japanese Yen (JPY)

In recent years, the JPY has proven to be a safer haven than the USD during economic and financial crisis. It’s reputation as a safe haven is driven by the fact that Japan enjoys a strong current account surplus and is positioned as the world’s largest creditor nation.

The JPY is also a popular carry trade. With low interest rates, it’s common practice for investors to borrow Yen to buy a currency in a country where the interest rate is higher. In times of financial crisis, investors often sell off riskier financial instruments to pay back Yen loans.

The USD and JPY are currently regarded as the safest safe-haven currencies. The USD/JPY currency pair doesn’t often experience volatile price moves but cross pairs that do include GBP/JPY, AUD/JPY and NZD/JPY.

 

Swiss Franc (CHF)

The CHF has been considered a safe-haven currency for as long as we can remember. This is largely due to the stability of the Swiss government and its sound financial system. Switzerland is world-renowned for having one of the most stable and safest banking industries, low-volatility capital market, almost zero unemployment, a positive trade deficit and a high standard of living.

In addition, Switzerland is independent from the European Union. This makes it relatively immune to negative market sentiment surrounding political and economic upheaval in the Eurozone, including Brexit. Switzerland is also a tax haven for wealthy investors.

 

How to measure volatility for forex trading

There are a number of useful indicators provided on trading platforms that help forex traders measure and assess currency pair volatility. They help identify potential breakouts and good trading opportunities.

Indicators used to measure volatility include:

 

Forex price charts

Price charts are a graphic tool that shows the historic behaviour of the relative price movement of currency pairs in different time frames. Basically, forex traders rely on past behaviour to predict future price movements.

The most common forex charts are line, bar and candlestick charts. The time frames range from tick data to hourly, monthly and yearly data. A tick in forex tick charts denotes the change in price of a currency pair which was caused by a single trade.

When a currency price is trending upward; each subsequent maximum is higher than the previous one and each subsequent minimum is higher than the previous one.

 

Moving Average (MA)

The two most common Moving Average (MA) tools form the foundation of technical analysis and a trader’s forex trading strategy.

  • Simple Moving Average (SMA) is the average price over a given number of time periods
  • Exponential Moving Average (EMA) gives more weight to recent prices

The Moving Average (MA) is one of the best ways to determine if a market is bullish or bearish. The MA is represented in the form of a curve which changes according to the direction of the trade. Forex traders typically use a combination of MAs, usually the 50-day MA and 200-day MA.

A Bull signal is raised when the price moves above the curve. A Bear signal occurs when the price moves below the curve. The trend is likely to reverse when the price crosses the curve. The potential direction and strength of the price movements in the forex market are reflected in the angle of the slope of the curve.

 

Average True Range (ATR)

The ATR tells forex traders the average trading range of the market in a set time frame. It takes the range of a currency pair (distance between the high and low in the time frame) and plots the measurement as a moving average.

When the ATR is set at 20 on a forex chart, it presents the average trading range for the past 20 days. Volatility is decreasing when the ATR is falling. Volatility if increasing when the ATR is rising.

The ATR is limited in that it is only a volatility indicator. It doesn’t show the direction of the trend. It’s useful purely to show whether the market is excited or wary over a range breakout.

 

Bollinger Bands

The sole purpose of Bollinger Bands is to measure volatility. Basically, two lines plot two standard deviations above and below the moving average in a set time frame.

If the indicator is set at 20, you get 20 Simple Moving Averages (SMAs) and two other lines. One line plots +2 standard deviations above and the other line plots -2 standard deviations below. When the bands contract, volatility is low. When the bands widen, volatility is high.

 

IN SUMMARY

 

Without volatility, forex trading would be a boring pastime. Volatility is what produces the adrenalin rush and keeps forex traders on their toes. You also can’t make money on the forex market if the prices aren’t moving.

The greater the volatility, the more opportunities for forex traders because the price moves are bigger and better. However, volatility increases the risk of forex trading and can lead to horrible losses. Your trading strategy and appetite for risk will determine whether you stick to currency pairs that are the least volatile or expand your portfolio to include more volatile currency pairs.

Commit to proper fundamental and technical analysis so you can make better judgement calls on currency pairs in volatile trading conditions. If you are a beginner forex trader and volatility makes you nervous, focus on the currency pairs that are safer options.

 

DISCLAIMER

Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. Forex trading involves a high degree of leverage which increases the risk associated with forex trading.

 

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