How to profit from volatile currency pairs

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The Most and Least Volatile Currency Pairs in 2020

You are probably familiar with the concept of “volatility”. If not, we recommend you to get more information on the subject before reading this article.

Here we will talk about the most volatile currency pairs in the Foreign Exchange (Forex) market in 2020.

We should note that by definition, volatility tends to change over time and is not a constant.

Volatility Is Relative

If you have ever traded in the Forex market or at least watched price movements from the sidelines, you might have noticed that the prices move non-linearly on the chart.

There are times when the currency price stands still or moves within a very narrow range. In this case, we talk about the low volatility in the market.

On the other hand, when key economic data are published or officials make a speech, the market price makes sharp and strong movements. So, here we can see an increase or even a spike of volatility.

To illustrate the non-constant nature of volatility let’s take a look at the Forex Volatility Calculator –http://investing.com/tools/forex-volatility-calculator.

All you need to do before you start using the tool is to enter the period in weeks, over which you want to measure the volatility.

Let’s take NZD/USD (New Zealand vs. US dollar) as an example. On the website, mentioned above, we select the four weeks to calculate the volatility. The results are displayed in three diagrams:

These diagrams show the average daily volatility of the NZD/USD pair since July 1. They also show an average weekly, daily and hourly volatility of the pair.

Based on all three diagrams we can conclude that volatility tends to change during any period.

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The hourly volatility diagram for NZD/USD, which peaks at 12 and 21 o’clock (GMT), is of particular interest. It fully coincides with the time of economic data releases for the USA and New Zealand. It also confirms the thesis on volatility increase upon major economic data releases mentioned at the beginning.

Volatility changes can be observed for all currency pairs. You can select any pair and see the statistics over different periods.

What Does Volatility Depend On?

What does the volatility of any currency pair depend on?

The main reason for the volatility is liquidity. A classic rule states that: the higher the liquidity is, the lower is the volatility, and vice versa.

Liquidity is the amount of supply and demand in the market. It means that the larger the supply and demand are, the harder it is to get the price moving.

According to that rule, we can conclude that exotic currency pairs are the most volatile ones in the Forex market because their liquidity is often lower than that of major pairs.

Volatility often occurs during major economic data releases as well, so it may be useful to download and install MT4 news indicator:

It can help to protect yourself against the unexpected market activity.

Let’s use statistics to verify the previous statements.

Table of The Most Volatile Currency Pairs

For our study let’s take seven major, cross, and exotic currency pairs, and draw up a comparative table based on the obtained data:

The Most Volatile Currency Pairs Table (data from 01-06-20)

The table shows that today the most volatile Forex pairs are exotic ones. Namely, USD/SEK, USD/TRY, and USD/BRL. All of them move on average for more than 400 points per day.

The volatility of the major currency pairs is much lower. Only GBP/USD moves for more than 100 points per day. AUD/USD turned out to be the least volatile currency pair.

As for the cross rates, GBP/NZD, GBP/AUD, GBP/CAD, and GBP/JPY are the pairs with the highest volatility. All of them move on average for more than 100 points per day.

CAD/CHF, EUR/CHF, AUD/CHF and CHF/JPY are the less volatility Forex pairs among the cross rates. The amplitude of their movements doesn’t exceed 60 points per day.

Resume

Based on these statements, the reader may conclude that trading the exotic currency pairs or cross rates promises large profits. However, it isn’t quite that simple.

Indeed, the range of exotic pairs’ movements is much broader than that of the major ones. However, such high volatility is a result of low liquidity, and trading the low liquidity currency pairs carries particular risks for a trader.

The fact is that various methods of technical analysis might not work in such situations. That is, if you decide to trade, say, USD/SEK or GBP/NZD, your analysis may not work as effectively as, for example when trading EUR/USD. Also, technical analysis patterns might generate false signals.

This is because the psychology of the market behavior in its most liquid form makes up the backbone of technical analysis. If the liquidity of a trading instrument is lower, the validity of technical analysis comes under question.

The second problem a trader can face when trading the volatile financial instruments is a wide spread (additional trading expenses).

Of course, we won’t discourage you to trade the low liquidity currency pairs. However, our task is to warn inexperienced traders and newbies that the risk of such trading is higher than that of trading the classic currency pairs.

What are the most volatile currency pairs?

Volatile currency pairs can offer many opportunities for profit. Learn more about forex volatility, including the names of some of the most volatile currency pairs and how to take advantage of their price movements.

Volatile currency pairs: what you need to know

The most volatile currency pairs offer enticing prospects for profit because their price movements can be more dramatic than less volatile pairs. However, while increased volatility may offer more scope to realise a profit, it can also increase a trader’s exposure to risk.

Largely speaking, volatile pairs are affected by the same drivers as their less-volatile counterparts. These include interest rate differentials, geopolitics, the perceived economic strength of each currency’s issuing country, and the value of these nations’ imports and exports.

That being said, there are a few things to bear in mind before opening a position on a volatile currency pair. The main thing to remember is that volatile currency pairs often have lower levels of liquidity than their less-volatile counterparts because not every trader has the appetite for risk to take a position on a volatile market. However, with a well-thought-out trading plan and risk management strategy in place, there is little to fear from volatile currency pairs.

A definitive list of the most volatile currency pairs is hard to collate, chiefly because volatility can affect different currency pairs at different times. This is because of the previously-mentioned factors, which can cause the price of a currency pair to rise or fall. However, some currency pairs have had historically high volatility.

List of volatile forex pairs

AUD/JPY

The first volatile currency pair on our list is AUD/JPY, which represents a pairing of the Australian dollar against the Japanese yen. This pair enjoys high volatility thanks to the inverse relationship between the Australian dollar and Japanese yen.

The Australian dollar is a commodity currency, meaning that its price is heavily linked to the price and volume of Australia’s exports, particularly minerals, metals and – to a lesser extent – agricultural products. Conversely, the Japanese yen is widely considered to be a safe-haven currency, meaning that investors often turn to it in times of economic hardship – something which they do not do with the Australian dollar.

As a result, the price movements of this pair can be very dramatic depending on the current global economic outlook. The graph below demonstrates the volatility in the AUD/JPY pair since September 2020.

NZD/JPY

NZD/JPY is a pairing of the New Zealand dollar against the Japanese yen. Similar to the Australian dollar, the New Zealand dollar is a commodity currency and its value is closely tied to the price of New Zealand’s agricultural exports, which can make this pair particularly volatile.

Some of the top exports from New Zealand are dairy, eggs, meat, wood and honey. As a result, any changes in the price of any of these markets will affect NZD’s value against the Japanese yen.

GBP/EUR

GBP/EUR is a matching of the British pound against the euro and, following Brexit, this pair has seen constant volatility. This is particularly true around any key policy announcements, or any crucial votes in the House of Commons.

For example, the pound increased against the euro following the first defeat of Theresa May’s Brexit deal in the Commons by 230 votes in January 2020. This rise came after sterling fell almost 7% throughout 2020, which reflected uncertainty surrounding the terms of the UK’s departure from the EU. Volatility in this pair could decrease if a withdrawal agreement is agreed, but so far there has been no sign of consensus.

CAD/JPY

CAD/JPY pairs the Canadian dollar and the Japanese yen. The yen is seen as a safe haven, and the Canadian dollar is a commodity currency, with its value on the currency market heavily influenced by the price of oil on the commodity market.

Adding to this, Japan is a top importer of oil, which means that as the price of oil increases, the cost of buying Canadian dollars with yen also tends to increase. This is because as oil prices rise, more yen must be converted into CAD to buy a single barrel of oil, with this increase causing the price of CAD/JPY to rise.

For example, if there was an oil supply cut from other countries around the world, the price of Canadian oil exports would likely increase, which would cause the Canadian dollar to increase against the yen.

Because of oil’s reputation as one of the most volatile commodities in the world, traders who are interested in the CAD/JPY pair should keep an eye on the oil markets and any relevant news releases, as these are sure to impact the volatility of this pair.

GBP/AUD

The GBP/AUD pair is comprised of the British pound and the Australian dollar. Historically, these two currencies have been correlated, particularly since Australia is part of the Commonwealth of Nations. However, being a commodity currency – as previously mentioned – the price of AUD is heavily linked to the value of Australia’s exports.

A knock-on effect of the US’s trade war with China has been that Australian imports to the Chinese markets have fallen. Since China is one of Australia’s main trading partners, this does not bode well for Australian manufacturers and exporters, who rely on strong trade links with China to maximise their profits.

As a result, currency pairs which contain AUD have seen increased volatility since the start of the trade war. To make matters worse for the GBP/AUD pair, the pound has seen increased volatility since the Brexit referendum result in 2020. Speculators are waiting to see whether volatility in this pair will ease off after 31 October – the official deadline for the UK’s departure from the EU to be finalised.

USD/ZAR

USD/ZAR sets the US dollar against the South African rand. Volatility in this pair is greatly affected by the price of gold. This is because gold is one of South Africa’s main exports, and gold is priced in US dollars on the world market – which means that the price of gold is strongly correlated with the strength or weakness of USD.

As a result, if the price of gold is rising, the price of the dollar will likely also increase against ZAR. This is good for South African exporters because it means that they will get more US dollars for their gold on the world markets.

However, this will also make it more expensive to buy US dollars with South African rand. Because of this, traders who are interested in the USD/ZAR pair should carry out sufficient analysis on the price of gold and the factors which affect its price before opening a position.

USD/KRW

The USD/KRW pair is the US dollar against the South Korean won. The South Korean won, in its current form, was formed after the separation of the Korean peninsula into two separate parts following the Second World War.

Following the separation, the South allied with America and the North allied with Russia. As a result, the economic disparities of capitalism and communism started to become apparent and can still be seen on the peninsula today.

With that being said, the won currently trades at around 1000 to one against the US dollar. Because of this inflated exchange rate, price movements in the USD/KRW pair are common, and many traders look to this pair as a way to make a quick profit.

USD/BRL

The USD/BRL pair is the US dollar against the Brazilian real. This pair enjoys frequent price movements, creating opportunities for traders who focus on day trading or even scalping.

As an emerging market, Brazil is an exciting economy for those seeking to capitalise on the forecasted future development of the South American country. However, politics in Brazil has been unstable at times, with corruption dominating headlines in the last decade or so.

This was exacerbated by the election of Jair Bolsonaro – a far-right populist – to the presidency in January 2020. On 2 January 2020, a day after Bolsonaro was sworn in as president, the real dropped 2.63% against the dollar, followed by 1.08% the following day and 1.07% the day after that. These drops are circled in the below graph.

Adding to this, there has been an economic slowdown following a two-year recession that started in 2020 and caused the economy to contract by 7%. Bolsonaro himself has said that he knows little about economics, and so volatility is likely to remain in this pair throughout his premiership.

USD/TRY

USD/TRY encompasses the US dollar and the Turkish lira. TRY has been highly volatile since 2020 following a failed coup d’état and the subsequent ‘purges’ that have been taking place in Turkish society.

Turkish politics remains highly unstable, with many still supporting the Peace at Home Council – the group behind the failed coup. This instability was reflected in the fact that the lira fell following heavy losses to President Recep Tayyip Erdoğan’s AK Party in elections held throughout 2020.

The lira will likely remain volatile until the current political instability in Turkey is settled, but speculation remains over how long Erdoğan will remain in power and whether his successor – if there is to be one in the near future – will be any better for the value of the lira in the global forex markets.

Because of the uncertainty surrounding the current outlook for the lira, USD/TRY is a key pair to watch for any forex traders seeking a highly volatile pair on which they have the scope to realise a quick profit by going either long or short.

USD/MXN

The final pair on our list – USD/MXN – puts the US dollar against the Mexican peso. Tensions between these two countries have risen ever since US President Donald Trump won the 2020 presidential election. More recently, a series of tariffs have been implemented on Mexican exports to the US, as well as a series of threats against Mexican immigrants trying to get into the US via its southern border.

The current tariff rate of 20% has already caused volatility in this pair to increase, with announcements surrounding the immigration policies of the Trump administration tending to have an adverse effect on the peso.

With the 2020 US election approaching, it is likely that this pair will remain volatile as Trump turns to his flagship immigration policies in order to energise his base for his re-election campaign.

What are the least volatile currency pairs?

The least volatile currency pairs are generally the majors. They are the currency pairs which have historically been the most popular among traders. These pairs include EUR/USD, USD/JPY, GBP/USD and USD/CHF.

Aside from these four ‘traditional majors’, most lists of major currency pairs will also mention a few commodity currencies such as AUD/USD, USD/CAD and NZD/USD; as well as some cross currencies including EUR/GBP, EUR/CHF and EUR/JPY.

How to trade forex volatility

Two of the most popular ways to trade forex volatility – or volatility in general – is by opening a CFD or spread betting account. CFDs and spread bets are financial derivatives, meaning that they afford you the ability to go long to bet on the market rising, as well as short to speculate on it falling.

There are five simple steps that will help you get started trading forex volatility:

  1. Research which forex pair you want to trade
  2. Carry out analysis on that forex pair, both technical and fundamental
  3. Choose a forex trading strategy and check you’re comfortable with your exposure to risk
  4. Create an account and deposit funds
  5. Open, monitor and close your first position

Most volatile currency pairs summed up

  • Volatile currency pairs can offer opportunities for quick profits
  • But, these profits sometimes come with an increased degree of risk
  • Volatile pairs often include at least one currency from a geopolitically unstable or less-developed country than the less volatile pairs
  • If traders don’t have a large appetite for risk, then the less volatile ‘major’ pairs might be of greater interest than the more volatile pairs

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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Top 10 most volatile currency pairs and how to trade them

FX markets are susceptible to a range of factors which affect their volatility, and many traders look to tailor their strategies to capitalize on the most volatile currency pairs.

Volatility, usually measured using the standard deviation or variance of a currency, gives traders an expectation of how much a currency can deviate from its current price over a certain period. The higher the volatility of the currency, the higher the risk. Volatility and risk are usually used as interchangeable terms.

Different currency pairs have different volatilities. The major currency pairs like the EUR/USD, USD/JPY, GBP/USD and USD/CHF generally have less volatility than the emerging market currency pairs like the USD/ZAR, USD/KRW and USD/BRL. Normally, more liquid currency pairs have less volatility.

Some traders enjoy the higher potential rewards that come with trading volatile currency pairs, although this increased potential reward comes with a higher risk, so traders should reduce their position sizes when trading highly volatile currency pairs.

What are the most volatile currency pairs?

The most volatile currency pairs are:

Source: Bloomberg Data, Historical volatility, Standard deviation over 10 years of lognormal returns

However, not all volatile FX pairs are major currencies. Many are also from emerging markets, such as USD/ZAR (US Dollar/South African Rand), USD/KRW (Us Dollar/South Korean won), USD/BRL (US Dollar/Brazilian Real), USD/TRY (US Dollar/Turkish Lira) and USD/HUF (US Dollar/Hungarian Forint).

Here is a summary of the top 10 Most volatile currency pairs

Top 10 Most Volatile Currency Pairs

The USD/ZAR , USD/KRW , USD/BRL and other emerging market currencies pairs tend to be highly volatile due to their low liquidity and because of the risk that is inherent in emerging market economies.

Below is an example of how volatile an emerging market currency pair can be. The USD/ZAR (US Dollar/South Africa Rand) moved 25% in a month and a half. Other emerging market currency pairs have also been seen to make these drastic moves.

What about the least volatile currency pairs?

The least volatile currency pairs tend to be the major currency pairs which are also the most liquid. Also, these economies tend to be larger and more developed which brings more trading volume to their currencies creating a tendency for more price stability.

The EUR/GBP , NZD/USD , USD/CHF and EUR/USD are the least volatile currency pairs. They are the least volatile because they trade with high volumes of liquidity.

As shown below, the USD/CHF’s average true range (ATR) ranges between 90 to 50 pips, a low average true range compared to other pairs. The average true range of a currency is one of the many ways to measure the volatility of a currency pair.

Correlation between two currencies can also lead to lower volatility. For example, the US dollar and Swiss Franc (USD/CHF) are both known as safe-haven currencies (as well as the Japanese Yen) – when risk enters the market, traders flock to these currencies. Both the US dollar and the Swiss Franc strengthen relative to other currencies but do not deviate significantly from each other, and hence the currency pair does not experience as much volatility.

How to trade currency pair volatility

Forex traders should take current volatility and potential changes in volatility into account when trading. Traders should also adjust their position sizes with respect to how volatile a currency pair is. The more volatile a currency pair, the smaller the position the trader should take.

To trade volatile currency pairs, you should understand the differences between volatile currencies and currencies with low volatilities, you should also know how to measure volatility and be aware of events that could create volatility.

The difference between trading currency pairs with high volatility versus low volatility

  1. Currencies with high volatility will normally move more pips over a certain period than currencies with low volatility. This leads to an increased risk when trading currency pairs with high volatility.
  2. Currencies with high volatility are more prone to slippage than currency pairs with low volatility.
  3. Due to high-volatility currency pairs making bigger moves, you should determine the correct position size to take when trading them.

There are several ways to measure volatility

To determine the correct position size, traders need to have an expectation of how volatile a currency can be. A variety of indicators can be used to measure volatility like:

  • A verage true range (ATR)
  • Donchian channels
  • M oving averages (by comparing the moving average to the current price).

Read our guide to Trading Volatile Markets to find out more about volatility – how it is measured, and how it applies to other markets .

Key things traders should know about volatility:

  • Big news events like Brexit or Trade wars can have a major impact on a currency’s volatility. Data releases can also influence volatility. Traders can stay ahead of data releases by using an economic calendar.
  • Volatile currency pairs still obey many technical aspects of trading, like support and resistance levels, trendlines and price patterns. Traders can take advantage of the volatility using technical analysis in combination with strict risk management principles.
  • Staying up to date with the latest forex pair news , analysis and prices can help you predict possible changes in volatility. At DailyFX we also have comprehensive forex forecasts to help you navigate the market.
  • DailyFX hosts daily webinars which can help you prepare for volatile market times.
  • Supplement your forex learning and strategy development with our New t o Forex g uide . This explains in detail the different aspects of forex trading, from bid/ask quotes to margin and short selling.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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