What Are the Most Volatile Currency Pairs?
The forex market is among the most liquid markets, and as a trader, you will make the fundamental decision of choosing the most volatile currency pairs when trading. Now, if you are a new trader, you probably have no idea about the volatility of currencies.
So, to begin, we will first help you understand the definition of volatility and currency pairs, then look at the most volatile currency pairs. After reading this guide, you will find it easy to choose the best currency pairs to trade.
Let’s get things started.
Understanding Currency Pairs
A currency pair involves the quoting of two currencies. The first currency gets quoted against the second. The first currency in the pair is called the “base currency,” and the second is called the “quote currency.”
The ISO currency code denotes the three-letter alphabetic codes of currency pairs. For example, you write the Canadian Dollar as CAD, and the Japanese Yen is JPY. So, when trading the CAD against the JPY, the currency pair will be CAD/JPY.
In a forex trade, traders purchase one currency and sell the other. During a purchase, traders buy the base currency and sell the quote currency. Also, when selling, traders sell the base currency and gain the quote currency.
Using the example of CAD/JPY, the base currency, CAD, is also called the bid price, and JPY, the quoted price, is also called the ask price. It is essential to know the market values of the bid and quote a price to help you determine if the pair is worth trading.
Spread is the difference between the bid and the ask price, and you can get this by subtracting the two. When writing in decimals, ensure you write up to the fourth decimal place because their variations are usually minimal.
What is Currency Volatility?
Before looking at the most volatile currency pairs, you should first understand the meaning of volatility. Volatility is the measure of considerable changes in market prices. The market’s liquidity determines how volatile the market prices will be.
Low liquidity means that the market is more volatile, and this can cause drastic changes in prices. When the market has higher liquidity, its volatility is low, meaning prices do not fluctuate drastically.
The forex market is prone to drastic changes in market prices, hence high volatility. This is because some factors like political, economic, and social events cause volatility in the prices. Traders should keep up with financial news to make profits and avoid losses.
Here Are the Most Volatile Forex Currency Pairs
Now that you know what volatility and currency pairs are and how they relate, we can look at the most volatile currency pairs. Note that the higher the level of volatility, the higher the potential risks, and the lower the volatility, the lower the degree of risk.
Besides the increased risk, high volatility also comes with a higher potential reward, so traders use this to their advantage. However, traders should be careful when trading with highly volatile currency pairs by reducing their position sizes.
The list starts with the currency pair of the Australian Dollar against the Japanese Yen. The high volatility in AUD/JPY is due to the inverse relationship between the two currencies. The AUD is a commodity currency. It has large commodity reserves because its price links to most of Australia’s exports like metals and minerals.
Japanese Yen is a currency that most investors turn to when the economy is complex, also known as a safe-haven currency. That makes the price movement against this pair very dramatic. However, the movement also depends on the current economic outlook.
The pairing of the New Zealand Dollar and the Japanese Yen makes another volatile currency pair. The New Zealand Dollar is also a commodity currency because its value relates to agricultural exports like eggs, meat, and honey.
New Zealand’s agricultural exports contribute to the volatility of the country’s Dollar with another currency. Therefore, when the export market prices change, they affect NZD’s value against that of the JPY.
There is volatility in the currency pair between the Canadian Dollar and Japanese Yen. Oil prices influence the value of the CAD, so it is a commodity currency. The Japanese Yen is a safe-haven currency.
That works well for the two currencies because Japan is a significant importer of oil. So, an increase in oil price leads to the rise in the cost of buying the Canadian Dollar using the Yen. That, in turn, increases the price of CAD/JPY.
There is a correlation between the British Pound and the Australian Dollar. That is because Australia is on the list of Commonwealth Nations. In addition, AUD is a commodity currency, and its price connects highly to the value of Australia’s exports.
Australian exports to China are falling because of the United States’ trade war with China. The falling value of Australian exports is weakening its correlated relationship with GBP.
The price of gold affects the volatility in the US Dollar against the South African Rand. Gold is a significant export of South Africa, and the commodity’s price on the world market is in US dollars, meaning the cost of gold depends on the value of the US Dollar.
If the price of gold rises, the US Dollar will have a higher value against ZAR. South African gold exporters will gain more dollars when trading with the world market. Nonetheless, buying US dollars with South African Rand becomes more expensive.
There is a highly inflated exchange rate by the US Dollar against the South Korean Won. That makes price movements in the USD/KWR common, and traders use the pair to generate more profits. The Won currency trades at 1000 per 1 US Dollar.
The USD/BRL (the US Dollar against the Brazilian Real) is volatile because it records many price movements, creating opportunities for day traders to make profits.
Brazil is an emerging market, which attracts many investors who seek to capitalize on the developing country. Therefore, the Brazilian real is an exotic currency.
Pro Tip: Since exotic currencies are volatile, any pair with an exotic currency creates a volatile currency pair.
Trading with volatile currency pairs can yield profits or cause losses. Since some currency pairs are hard to predict, beginner traders should stick to the major currency pairs because they rarely change. However, using the most volatile currency pairs with the proper risk management can yield profits