Top 10 Most Volatile Forex Pairs

Overview

Due to the dramatic movement of prices of certain currency pairs, they offer traders more enticing predictions for profit, although trading such pairs may also expose traders to significant risks.

Volatile Forex pairs are affected by the same factors as less-volatile Forex pairs, which, as previously mentioned, includes interest rates, geopolitical factors, and numerous others.

When trading volatile Forex pairs, it is imperative for traders to note that these pairs often present lower levels of liquidity than less-volatile Forex pairs and it is therefore imperative to ensure that traders have adequate trading plans, adequate risk management, and well-tested trading strategies.

AUD/JPY

This currency pair represents a pairing between the Australian Dollar against the Japanese Yen. This pair is an exciting pair to trade due to its relation to risk in addition to being one of the most highly correlated pairs to price action.

This price action in US equities is on a short to medium-term basis and AUD/JPY is known for its tendency to rise in a low-risk environment on carrying flows. When the opposite is true, it is not difficult to see an approach associated with ‘risk-off in the markets.

The forecast on this particular pair is that the AUD is to remain neutral while the JPY is bullish as there is a rise predicted as the S&P 500 falls based on Stimulus Woes.

The AUD is a commodity currency and therefore the price thereof is linked to the price along with the volume of Australian exports including minerals, metals, and others. JPY is widely considered a safe haven currency and one traded most during times of economic uncertainty.

Pivot points for the AUD/JPY, on the date and at the time that this article was written, are as follows:

NZD/JPY

This currency pair is between the New Zealand Dollar and the Japanese Yen. As with AUD, NZD is also a commodity currency which has its value closely tied with the agricultural exports of New Zealand, which makes this currency substantially volatile.

The main exports in New Zealand include dairy, eggs, meat, wood, honey, and others, and as a result, the slightest change in these exports will drastically affect the value of NZD against JPY.

Not only is JPY a safe haven currency, but it has a history as a low-yielding currency which makes it an attractive vehicle to fund carry trades. Such trades are often favoured by investors during times of optimism regarding global economic performance and stability.

Considering these factors, it makes the NZD/JPY particularly susceptible to swings in broad-based market sentiment trends. The Forex pair is therefore also highly likely to respond to economic news both domestic in addition to that of key trading partners.

These factors greatly shape expectations for the Reserve Bank of New Zealand and its monetary policies.

Pivot points for the NZD/JPY, on the date and at the time that this article was written, are as follows:

EUR/GBP

The EUR/GBP is a pairing of the Euro and the British Pound which is nearly constantly in a volatile state. It is one of the currency pairs which is traded the most due to the marriage between two significant European economies namely the EU and the UK.

The current volatility on this currency pair is, in addition, also attributed to the Brexit update and trade deal negotiations which are set to resume, with a deadline on an agreement set for the 15^th of October by UK Prime Minister, Boris Johnson.

In addition, both EU and UK are set to release gross domestic product data during the upcoming week as both economies emerge from lockdowns as result of the Covid-19 pandemic in an attempt to curb the spread of the virus.

Pivot points for the EUR/GBP, on the date and at the time that this article was written, are as follows:

CAD/JPY

This pairs the Canadian Dollar with the Japanese Yen and it is seen as a strong substitute for the USD/JPY pair for traders who are wary of trading the US Dollar with current economic and financial conditions and uncertainties.

This pairing is also historically more sensitive to any changes that may occur in the market-wide sentiment as opposed to the USD/JPY pairing as a result of historically higher yield which is attached to the Canadian Dollar.

The Canadian Dollar is also known for being susceptible to oil prices due to Canada’s energy exports. The current forecast on the CAD/JPY is that CAD is bearish due to the Bank of Canada’s decision as Covid-19 cases rise whereas JPY is bullish as the S&P 500 falls on Stimulus Woes.

Pivot points for the CAD/JPY, on the date and at the time that this article was written, are as follows:

GBP/AUD

This pairing consists of the British Pound and the Australian Dollar. When viewing the history of this pair and the way these two currencies are linked it is mainly due to Australia as part of the Commonwealth of Nations.

The Australian Dollar is a commodity currency and thus, the price of the AUD is heavily associated with and affected by Australia’s exports.

One of the predominant knock-on effects that Australian imports are experiencing are due to the trade war between the United States and China, and the subsequent fall in Chinese markets which have resulted in Forex pairs which contain AUD to increase in volatility.

Whereas the GBP outlook warns traders of a volatile week ahead, AUD outlook is hinged on the RBA meeting and the Australian Budget Update.

Pivot points for the GBP/AUD, on the date and at the time that this article was written, are as follows:

USD/ZAR

This Forex pair links the US Dollar with the South African Rand with the volatility of this pair linked with the price of gold. Gold is one of South Africa’s main exports which is priced in USD on the world market.

With the price of gold rising, the price of the dollar is also set to increase against that of ZAR. ZAR looks to benefit greatly should investors be willing to take on more risks in developing countries such as South Africa.

Should there be any pullback in risk from global markets, ZAR is set to be pushed substantially lower as was the case during the 2008 financial crisis.

Pivot points for the USD/ZAR, on the date and at the time that this article was written, are as follows:

USD/KRW

This Forex pair consists of the US Dollar and the South Korean won. KRW, in its current form, was formed after the Second World War and after a subsequent separation, South Korea allied with America while North Korea allied with Russia.

As a result of these divided alliances, the economic differences associated with capitalism and communism became quite apparent. South Korea won has risen as one of the top performers in Asia during September with a subsequent gain of 1.2% against the USD.

While bond inflows are quite supportive, equity selling has eased significantly however, economists at ANZ Bank forecast that the market will increase in volatility as the US elections approach.

Pivot points for the USD/KRW, on the date and at the time that this article was written, are as follows:

USD/BRL

This pair consists of the US Dollar against the Brazilian real. This pair often enjoys frequent movements which create an array of opportunities for traders to focus on day trading strategies including that of scalping.

This currency pair has seen additional bullish conditions during recent trading sessions as a collective attack waged on vulnerable resistance mounts. The resistance levels of the USD/BRL have seen increased pressure in addition to higher values which appear to be attainable.

Brazil has remained an important economic engine in South America in addition to being a valued trading partner in the world. The importance of Brazil has therefore remained strong in the long run.

Pivot points for the USD/BRL, on the date and at the time that this article was written, are as follows:

USD/TRY

This Forex pair is made up of the US Dollar and the Turkish Lira. At the start of 2005, a new version of the Turkish Lira was issued following the fall of the Lira’s value to such an extent that the conversion was US Dollar 1 to 1.5 million TRY.

Due to the Turkish economy’s reliance on foreign cash in order to earn short-term profits on higher interest rates, the Lira is exceptionally susceptible to global headwinds in addition to the subsequent risk-off environment.

Such factors can lead to a substantial depreciation of the Lira and are one of the main reasons why the USD/TRY is such a volatile Forex pair.

Due to existing political issues in Turkey, there are great delays caused by the EU to have Turkey join the Euro-zone.

Pivot points for the USD/TRY, on the date and at the time that this article was written, are as follows:

USD/MXN

This pair consists of the US Dollar and the Mexican peso. The geographic proximity of Mexico to the United States in addition to its membership in the North American Free Trade Agreement, or NAFTA, has resulted in the high responsiveness that this currency pair has to economic developments in the largest consumer market in the world.

The Peso is a higher-yielding currency, and it is, therefore, more attractive during times when traders are more optimistic regarding the state of the global economy which results in returns being prioritized over safety.

Due to such factors, the USD/MXN is extremely sensitive to swings which occur in the broad-based market sentiment trends.

Pivot points for the USD/MXN, on the date and at the time that this article was written, are as follows:

What is Market Volatility

Market volatility is a common term that is used to describe daily fluctuations, whether they are large or small, of financial markets. It can also be used to describe the condition of security, such as a currency or Forex pair, as it is a general term used.

Should a security, asset, or financial instrument have high volatility, it means that its value fluctuates frequently over a period of time whereas low volatility indicates that it remains relatively steady over a period of time.

Financial instruments which have higher volatility often indicate riskier investments where traders have a chance of gaining great profit but are also faced with substantial risks and losses that may exceed their initial deposits.

There are various factors that may affect market volatility namely world events, the performance of a certain sector in the market, political factors, and even natural disasters. Such factors are often beyond the control of traders however, traders can prepare themselves adequately should volatility in the market increase.

Causes attributed to volatility in financial markets

When uncertainty occurs for the risk involved with a security’s change in value, it leads to sudden and often severe volatility in the market. This can lead to the value of security spreading out over a larger range and subsequently, the price of the security may change dramatically within a noticeably short period of time.

One of the main driving forces behind volatility is market sentiment which is subsequently influenced by some of the following factors namely:

• Economic news including that of data releases, central bank announcements, and others
• Changes in interest rates
• Political developments including changes in political leadership, elections, and others
• New product releases from companies
• Recommendations from well-known, reputable analysts, and
• Trends that arise when and where traders follow others.

How is Volatility measured?

Volatility in the market is often measured by making use of Standard deviation. It is the standard statistic used to measure volatility as it shows how tightly clustered or how spread out a set of data is. This is done by measuring it from the mean or average of that specific data.

What are the effects of market volatility on the markets?

When there is volatility present, it may have some significant impacts on the markets which may inadvertently affect trading, these include:

• Delayed execution – trades may be delayed from being executed due to high volumes of trading in times when volatility is high. In addition, high volumes may also affect prices as they may be different from quotes given at the time that an order is placed.
• Digital disruption – the capacity of systems may make it difficult for traders to execute their trades in addition to high internet traffic making it difficult for traders to access their trading accounts.
• Questionable Market Trends – when there is high volatility present in the market, it may be difficult for traders to accurately identify market trends.

Currency Volatility

As mentioned, volatility does not only affect the markets at large, but can also affect individual financial instruments such as currencies, or Forex pairs. This is referred to as foreign exchange or FX volatility.

It is the unpredictable movement of exchange rates in the Forex market and it may lead to either substantial losses or gains in the Forex Market as it is the principal cause of foreign currency risk.

Forex volatility is one of the predominant credit risks that the corporate sector may face and it requires adequate management to ensure that the bottom line of a company can be protected.

There are numerous factors that can lead to volatility in currencies including inflation levels, interest rates, tourism, geopolitical stability or instability, import and export levels, monetary policies, and numerous other factors.

How can volatility in currencies be identified?

It is quite difficult to identify volatility in currencies as volatility is unpredictable. There are, however, methods through which volatility can be measured which can aid traders in more effectively predicting what might happen more than when it may happen.

It is important for traders to note the two predominant types of volatility that need to be addressed so that they can obtain a more accurate measure namely historical volatility and implied volatility.

Historical volatility is that which has already occurred whereas implied volatility is a measure of the expectations of a trader for the future which is based on the price of futures options.

Charts provide traders with valuable insights pertaining to historical volatility as they indicate spikes and troughs in the prices of a currency. To measure implied volatility, traders can make use of the four CBOE indices. These measure the expectations of the markets associated with currency volatility.

How to trade volatile Forex Pairs

Traders who want to trade volatility in the Forex market can do so through two popular ways namely either opening a CFD account with a broker, or a spread betting account, although spread betting is only limited to EU clients.

Both CFDs and spread bets are financial derivatives that provide traders with the ability to either go long to bet when the market rises or too short to speculate should the market be falling.

To start trading Forex volatility, traders can follow these simple steps:

1. Traders need to select and research a volatile Forex pair that they want to trade, which can be any from the list provided earlier in the article.
2. Traders must conduct a thorough analysis on the Forex pair of their choosing which will include both a fundamental and technical analysis.
3. Traders can then proceed to select a trading strategy that they are comfortable with, familiarize themselves with the strategy, backtest it, and ensure that they are comfortable with their exposure to risk.
4. Traders must then find a Forex broker that adequately caters for their trading needs, open a live trading account and deposit their initial deposit.
5. Lastly, traders can open a position with the Forex pair that they would like to trade and subsequently monitor their position and close it according to their trading plan.

Although these steps may sound simple, each one entails a series of steps and processes which need to be followed. Beginner traders cannot start trading without ensuring that they have the necessary Forex knowledge and general know-how of trading.

Each step involves a process and beginner traders will need to conduct the necessary research into each to ensure that they are prepared for trading in a live environment where their funds are at risk.

Which indicators to use when trading both low and high volatility currencies

When trading either low or high volatility Forex pairs, there are various indicators that traders can use. When trading lower volatility pairs, traders can use support and resistance levels as they show where the Forex market has moved and where it has pulled back up again.

Thus, these indicators can be used to trade in helping the trader predict the movements in the markets. Traders can set their stop-loss at a level where they are comfortable to ensure that the trader’s losses do not accumulate.

However, this may be more difficult to do where volatile currencies are concerned as the price movements associated with such Forex pairs are much more erratic. When trading highly volatile Forex pairs, traders can use some of the following indicators:

• Bollinger Bands – which indicate whether the market is overbought or oversold which subsequently increases the chance that prices may move in the opposite direction
• Average True Range – which is used as a measure of volatility which can be applied to trade exit methods along with use of trailing stop to limit the trader’s losses.
• Relative Strength Index – which can be used to measure the magnitude of price changes and may also indicate whether a currency has been overbought or oversold. This allows for the trader to decide on their trade position.

What is the difference between volatility and risk?

Traders should note that there are distinct differences that exist between volatility and risk. Whereas volatility is out of the trader’s control, risk, however, is not. Risk depends on the trader’s tolerance and willingness to be exposed to risk, as well as how much risk they want to be exposed to.

The relationship that exists between the two is strong as there is significant risk associated with the trading of volatile Forex pairs due to the tendency of prices to move sharply in any direction, at any given time. This substantial swing can lead to either great gains or great losses.

There is, however, one common pattern that frequently emerges in Forex trading which involves what is known as ‘herd mentality. This occurs when traders decide to take a chance on a volatile market due to the influence of other traders who are doing the same.

Should the Forex market crash, traders can sell at a lower price, but this may result in big losses. Traders are advised to ensure that they are aware of the risks involved with trading Forex and to weigh both the pros and cons of any trade especially during volatile conditions.

Traders should never take a risk merely based on popular opinions but should rather ensure that they have a solid trading plan in place, that they conduct the necessary analysis, and that they have a trading strategy that they are familiar with and that has been thoroughly tested.

In addition, it is imperative for traders to ensure that they have adequate risk management plans, protocols, and procedures in place, and that they make great use of risk management tools provided by their broker to minimize their exposure to risk and subsequent losses.

Tips when trading volatility in the Forex Market

When trading a volatile Forex market, there are numerous tips and trading strategies that traders can employ. This not only allows the trader to make the most of their trades but also helps them minimize the risks.

Volatile markets are risky to trade in, so it is imperative for traders to ensure that they have a solid strategy and trading plan in place and to keep to it.

Some tips when trading volatile Forex pairs include:

• Trade using charts as well as indicators
• Trade around news and events – do not get too focused on news; only filter what is applicable to the trade
• Use stop-loss and take profit
• Keep position sizes low
• Adhere to the Forex trading strategy employed in addition to the trading plan, and
• Keep a trading journal so that gains and losses can be recorded and adaptions to the trading strategy can be made to avoid repeating the same mistakes.

Conclusion

There are numerous gains that can be made from trading volatile Forex pairs, but traders are always urged not to take risks that they cannot afford, and to ensure that they have the necessary risk management protocols in place to protect them from loss.