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.
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 2017.
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 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.
Find out more about the effects of Brexit on the British economy
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 2019. This rise came after sterling fell almost 7% throughout 2018, 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 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.
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 2016. 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 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.
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.
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 2019. On 2 January 2019, 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 2015 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 encompasses the US dollar and the Turkish lira. TRY has been highly volatile since 2016 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 2019.
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.
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 2016 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 (大口）, 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.
Find out more about the major forex pairs
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:
- Research which forex pair you want to trade
- Carry out analysis on that forex pair, both technical and fundamental
- Choose a forex trading strategy and check you’re comfortable with your exposure to risk
- Create an account and deposit funds
- 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.
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