Volatilityevaluates how risky the investment is. The higher the volatility, the riskier a trade becomes, and conversely when the volatility is lower.It measures the extent of changes in the currencys value. A highly volatile currency experiences more frequent and steep price movements. Low liquidity is often the main factor contributing to volatile prices. The lower the liquidity of a currency, the more volatile the movements are.
What are the Most Volatile Currency Pairs？
Market sentiment and liquidity are among many factors that cause price volatility. You can notice that some currency pairsor specific currencies are more volatile than others. For example, currencies of emerging markets and exotic currency pairs are usually more volatile than major currency pairs or safe-haven currencies. The US dollar is one of the less volatile currencies due to its high liquidity, however, some exotic USD pairs can be very volatile.
1. The Canadian Dollar Vs. the Japanese Yen (CAD/JPY)
The inverse correlation between the two currencies makes the pair more volatile. The yen is categorized as a safe haven currency, meaning that it is more vulnerable to the risk appetite mode. The yen benefits from risk aversion, while a higher risk appetite reflects negatively on the currency. The Canadian dollar is directly affected by oil prices, which adds to the pairs volatility.
2. The Australian Dollar Vs. the Japanese Yen (AUD/JPY)
This pair has an interesting inverse relationship, as the two major currenciesare affected differently by market sentiment. The AUD benefits from a higher risk appetite, while the Yen usually rises as investors avert from risking, turning their investment towards the safe-haven currency. The pair is highly vulnerable to market sentiment.
3. The US Dollar Vs. the Turkish Lira (USD/TRY)
The political and economic instability has made the Turkish Lira one of the most volatile currencies of all time with drastic price fluctuations.
4. The British Pound Vs. the Australian Dollar (GBP/AUD)
Despite the fact that both are major currencies that enjoy high liquidity, this pair is considered to be the most volatile pair among GBP Pairs. The volatility of the GBP following the Brexit referendum and political turns after is the main factor behind the pairs high volatility.
Currency Pairs and Volatility
After researching the most volatile currency pairs in 2021, it is important to learn some basics about the currency pairs in the forex market and the three main categories.
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Major Pairs:The major pairs are the most traded major currencies against the US Dollar. These pairs enjoy high levels of liquidity. Examples of major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CAD.
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Cross Pairs (Minor):A cross currency pair is the currency pair that does not involve the US dollar. Despite enjoying sufficiently liquid markets, they are not as liquid as major pairs. Thecross currency pairswith higher trading volumes are the ones that include a major currency. Some examples of cross currency pairs are; EUR/GBP, GBP/JPY, and EUR/CHF.
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Exotic Pairs:The pairs that include currencies of emerging markets. They are not as liquid as majors or crosses, so they are characterized by higher price swings. USD/TRY and USD/MXN are among the exotic currency pairs.
Liquidity refers to how active the market is, how easily or quickly you can execute a trade. Typically, it is determined by the total active traders and total trading volumes.High liquidity is one of the top benefits of forex trading as it is accessible 24/5 with over $6 trillion dollars being traded on a daily basis.
The market‘s liquidity has a big impact on how volatile prices are. The more liquid a market is, the lower volatile the price is. That’s why most forex traded pairs like the EURUSD normally do not experience high price fluctuations. On the other hand, exotic currency pairs fluctuate more often due to low liquidity.
How to Trade Volatile Currency Pairs？
Choosing the right currency pair to trade will depend on the followed trading strategy.For example, range traders will find trading on exotic pairs not relevant, instead, they may focus on trading major currencies with limited price swings. While trend traders may get more attracted to the most volatile currency pairs. Watching the market sentiment is also very critical when trading the most volatile currency pairs.Read how to predict market volatility.
One good strategy to deal with a volatile market is to start small and to choose your trades wisely. Because volatile pairs are unpredictable, it is important not to be overconfident, and to be willing to rapidly make changes when necessary. Leave the emotions out of your decisions, stay focused and track your trades.
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