What are the most volatile currency pairs in forex? There are quite a few factors that determine how profitable a currency pair is or how optimal it might be for trading or not.
One of them turns out to be “volatility,” a term that is thrown around a lot. This piece aims to fully explain what this term means. Also, the most volatile currency pairs are highlighted in the list below.
What Is a Currency?
Starting from the basics is necessary, so what is a currency? We use them every day to conduct our various activities
A currency is an official means of exchange in any country. . This currency is always approved by the leaders of every nation.
Before the initiation of recognized currencies, trade and barter used to be the norm.
Nowadays, even loads of digital currencies now exist! Bitcoin and Ethereum are the leading spearheads for cryptocurrency.
What Are Currency Pairs In Forex?
Pairs of various countries are placed/ compared against one another and are referred to as currency pairs. More precisely, the value of one nation’s currency is plotted against the other.
Generally, the value of every currency in the world fluctuates, though by a minute value. Forex traders take advantage of these small changes, you could say, on a daily basis.
The economic state of a nation, inflation, interest rate, government policies, etc. affects the value of a currency.
What Is Volatility?
The most volatile currency pairs tend to move in opposite directions at the same time. This means that when one currency rises against another, the other will fall.
The volatility of a currency pair is a measure of how frequently the price of this pair changes. A pair that changes price rapidly has high volatility, while a currency pair that does not fluctuate aggressively is not.
The more stable the price of a currency pair is over a given time, the less volatile it is.
Forex traders have to be careful when dealing with volatility, as it is a two-edged sword.
In volatile markets, large sums of money can be lost just as fast as it is made.
Factors That Affect The Volatility of Currency Pairs
The stability of a currency pair depends on the stability of the base and quoted currency pair themselves.
Also, major news about economic changes or government policies will affect the sentiments of investors. For instance, when the COVID pandemic started, this triggered an increase in the market’s volatility.
The number of market participants can determine the volatility of a pair. This is the reason exotic currency pairs are so volatile.
The market participants being few leads to prices being altered easily. An example of a popularly traded exotic pair is the USD/ MXN.
Moving on, three of the most volatile currency pairs in the forex market will be listed below.
AUD/JPY
AUD/JPY currency pair is generally regarded as the most volatile currency pair in the market. It represents the Australian dollar against the Japanese yen.
In the Asian continent, the Japanese yen on one hand is often used. The currency is very stable, making it a safe-haven currency.
Similarly, the commodity; gold, since its value appreciates over time, is a haven.
Investors turn to these in times of hardship for financial security.
Industries in Japan manufacture appliances, gadgets, cars, etc. All of these products have a high all year round, sustaining the demand for the currency.
As for the Australian dollar, its worth is heavily dependent on the economy of the nation’s large degrees of fluctuations.
This disparity between the two currencies leads to a high level of volatility.
NZD/JPY
This currency pair comprises the New Zealand dollar and the Japanese yen. The Japanese yen as I pointed out above, is a safe haven currency pair.
While the value of the New Zealand dollar is heavily reliant on the economic situation of the nation/ exportation of commodities.
Furthermore, changes in the price of these exports are bound to happen at certain intervals, leading to high levels of volatility.
AUD/USD
The American and Australian dollars respectively are the elements of the AUDUSD volatile currency pair. Forex traders tend to also call this pair the Aussie.
Moreover, the US dollar is a global currency because the United States because of a flexible and robust economy.
Contrarily to that, the Australian dollar is backed by the various sectors that constitute the economy of the nation.
GBP/EUR
The UK pound has been relatively stable against the euro since the Brexit vote. However, there are some signs that the pound could weaken further as the UK prepares to leave the EU.
The UK government has said that it will not pay any money to the EU until it leaves the bloc.
This means that the UK would lose access to the single market, which includes the free movement of people, services, and capital.
As a result, the value of the pound could fall against other currencies.
EUR/JPY
This pair tends to move up and down together because both countries use the same currency.
In addition, Switzerland is one of the world’s largest exporters of goods and services. As such, its economy is closely tied to the performance of the US economy.
Switzerland also has a large financial sector, so it is sensitive to changes in the US economy.
The Swiss franc is pegged to the US dollar, so when the US dollar rises, the Swiss franc falls. Conversely, when the US dollar declines, the Swiss franc rises.
Which Currency Pair is Most Predictable?
The currency pairs in forex are classified into three categories. They are; major, minors, and exotic pairs.
Pairs like EUR/USD and GBP/ USD are major currency pairs because the currency these pairs contain is that of renowned economies. Therefore, an influx of large amounts of liquidity because of the large participant trading these pairs they aren’t volatile; more predictable.
Exotic pairs on the other hand, only have a few people trading them, leading to extremely volatile conditions. A few examples are USD/TRY, USD/MXN, and USD/ZAR.
The EUR/USD (the fibre) is undoubtedly the most traded pair on a daily basis. It earns this title by accounting for over 20 per cent of daily transactions in the forex market.
This is due to the robust economies of these two countries. Hence, liquidity is at an excess, so spreads are low additionally since this pair isn’t volatile so losses are minimal.
Another good shout is the USD/CHF, an alternative name for this pair is “the Swissie”. This pair contains the US dollar against the Swiss Franc. Both of the currencies in this pair are stable currencies which leads to minimal fluctuations in price.
The first thing to realize is the EUR/USD pair is the most traded pair in the forex market. In addition to this, both currencies that the pair represents are very stable. This results in price action in small ranges- relative to price.
GBP/USD positive correlates with the EUR/USD pair i.e., the move in the direction. This is usually the case for every pair with the American dollar as their quoted/ counter currency (XXX/USD pairs).
Although they move in the same direction, GBPUSD moves more in terms of pips daily, which is more volatile.
Summary; The Most Volatile Currency Pairs In Forex
Volatility is necessary for every good pair but only moderately. My advice would be to trade currency pairs with a good balance of volatility. A solid example is the GBP/USD, which ensures risk is managed without compromising on returns.
Although it isn’t a “currency” pair XAU/USD is infamous for blowing various accounts newcomers into the forex market as it is extremely volatile.
On the other hand, pairs with very low volatilities aren’t ideal either. It takes prolonged periods to reach certain price ranges.
Lastly, as consistently mentioned above, volatile pairs include a stable/ safe haven currency alongside a currency of an upcoming economy/ unstable economy.