Volatility refers to the frequency and magnitude of price changes of financial instruments. An asset is said to be highly volatile if its price swings a lot over a short period, such as one day. Contrary to this, there is no volatility if the asset price does not move within a short span. The forex market is known to have increased volatility levels. While volatility help scalpers find multiple trading opportunities and make quick profits, it can also lead them to incur severe trading losses if the market moves unfavorably. In this article, we discuss the most volatile currency pairs in detail. 

What are the most volatile currency pairs, and how to trade them?

Traders employ various trading strategies to trade and benefit from the forex market volatility. For instance, standard deviation and price variance help traders predict how much an underlying currency pair will fluctuate over a specific time. Investors can also evaluate FX volatility by observing the currency pair’s true range or the percentage of the spot range. The volatility of different currency pairs varies. The higher a currency pair is volatile, the more significant risk it carries and vice versa. Given below is the list of the most volatile currency pairs.

  1. Australian Dollar/Japanese Yen – AUD/JPY
  2. Canadian Dollar/Japanese Yen – CAD/JPY
  3. Australian Dollar/Pound Sterling – AUD/GBP
  4. New Zealand Dollar/Japanese Yen – NZD/JPY 
  5. Australian Dollar/US Dollar – AUD/USD

On the other hand, The liquidity and volatility of other major forex pairs, such as EUR/USD, GBP/USD, USD/JPY, and USD/CHF, are relatively lower. Notably, emerging market currencies, such as the USD/ZAR, USD/MXN, and USD/TRY are known to have the world’s highest volatility levels.

As a result of the inherent risk in emerging market economies, their relative currencies are considered exceedingly volatile. The US Dollar/South African – USDZAR chart below shows how volatile developing market currencies can be, with the USD/ZAR rising by roughly 25% in just over a month. That’s not the first time a currency pair from an emerging market has swung dramatically.

For forex traders, present volatility readings and potential volatility changes hold critical significance while making trades. Traders should also modify their positions according to the currency pair’s volatility. Reducing your position size might become necessary when trading highly volatile currency pairs. 

This knowledge helps traders set suitable stop loss (SL) and take profit (TP) limit orders based on volatility. Investors should also understand the key characteristics of the most volatile and least volatile currencies. In addition, traders need to be able to gauge volatility and be alert to any events that could cause it to spike or plummet significantly.

How to measure a currency pair’s volatility?

Traders need to evaluate the volatility of a currency to establish the appropriate position size. Investors can employ various indicators to measure a currency pair’s volatility, including but not limited to the Average true range (ATR), Donchian waterways, and Moving Average indicators. Volatility implied readings, which indicate the predicted degree of volatility obtained from options, are another option for traders to investigate.

Please note that market volatility has several implications for traders.

Important socioeconomic events can significantly affect a currency’s volatility, such as trade wars and Brexit. Volatility can be influenced by data releases as well. An economic calendar can help traders remain on top of upcoming data releases.

Many technical components of trading, such as resistance and support levels, trendlines, and price patterns, still apply to volatile currency pairs. A mix of technical analysis and risk management concepts can help traders cater to the market’s volatility and use it.

Traders need to stay abreast of the latest FX news, research, and rates to anticipate probable volatility shifts. Various online sources provide information related to trading, such as our Academy, helping you make informed trading decisions when dealing with the most volatile currency pairs. Learn more about forex and refine your trading tactics with the help of Traders Central

Which currency pairs are the least volatile?

When it comes to currency pairs, the most stable currencies happen to be the most liquid ones. This is because, besides being large, these economies are typically more developed. As a result, more trading volume is generated, resulting in a more stable price. Therefore, it shouldn’t be surprising that EUR/USD, EUR/GBP, and USD/CHF are some of the least volatile currency combinations.

According to the chart below, USD/CHF has a low ATR (Average True Range) compared to other currency pairs. You can measure volatility in various ways, including the currency pair’s true range. To determine the FX pair’s volatility, investors can also use the Bollinger Bandwidth (another commonly used technical indicator). 

The volatility of two currencies can also have a correlation impact. The more favorably connected two currencies are, the less volatile they may be. Notably, the US Dollar (USD) and Swiss Franc (CHF) are considered safe-haven currencies.

It is not uncommon for the USD and CHF to rise against their sentiment-linked counterparts when the market suffers periods of risk aversion. As a result, the USD/CHF has a low level of volatility.

What is the difference between trading the most and least volatile currency pairs?

  • Highly volatile currencies tend to move more pips than those with low volatility over a short period. Moreover, trading volatile currency pairs carries excessive risk.
  • Slippage is more likely to occur when trading high-volatility currency pairings than low-volatility currency pairs.
  • Trading high-volatility currency pairs necessitate determining the appropriate position size.

How has the FX market’s volatility changed over the previous years?

Over the recent years, bond investors have turned to FX trading, spotting market trends due to a lack of activity in fixed income markets. That became the turning point for the enormous but typically obscure foreign currency markets.

During the COVID-19 outbreak, central banks bought bonds at around $2 billion per hour, crushing volatility and reducing its usefulness as a signaling tool. In addition, the collapse of Interest rate differentials made currency markets more unpredictable than before.

Investors now believe that a currency market alternative is always available if bond markets get shattered. Clients now look upon currencies to predict market moves instead of focusing on the bond market projections. The volatility of numerous currencies, including the US dollar (USD), the Chinese yuan (CNY), the Euro (EUR), and the British pound (GBP), has increased, according to a State Street index of goods prices.

How can investors find updated information concerning possible currency market fluctuations?

Traders can find updated information on multiple financial websites featuring economic calendars, such as FXStreet.com, DailyFX.com, etc. Knowing forthcoming significant event risks can help traders avoid trading mistakes.

Forex traders should know the event risks that affect major currencies. Moreover, investors trade the news because it may enhance short-term volatility. Thus they want to trade news with the most market-moving potential.

Price action and volatility are often driven by:

  • Monetary policy changes
  • Economic data surprises
  • Global leader tweets
  • Fiscal policy shifts

Economic Calendar covers major events and economic data from the most-traded nations. It helps you determine each event’s relative significance. Traders can also filter out the economic calendar by the level of the potential impact of the upcoming news on the currency market. By choosing “HIGH,” you can see events known for triggering higher volatility in the forex market.

If you explore the Economic Calendar, you’ll see that the most significant events relate to inflation, economic growth, interest rates, retail sales, manufacturing, and consumer confidence. For example, Central bank rates, Labor statistics, Growth (GDP), Balance-of-trade, etc. 

All these economic releases’ relevance may fluctuate depending on global events. For instance, Interest rate choices may be the emphasis at one moment but not at another. Therefore, staying abreast of the market is crucial.

To learn more about trading markets, check out our Academy. We have a wide range of educational resources, across all financial markets, including currency, indices, stocks, and cryptocurrencies. We also help competent traders reach their full potential with our funding solutions