Currency volatility, often measured by calculating the standard deviation or variance of currency price movements, gives traders an idea of how much a currency might move relative to its average over a given time period. A currency pair’s true range can be used to gauge volatility. Alternatively, traders can use the percent spot range to measure volatility.
Higher levels of currency volatility mean higher levels of risk. Risk and volatility are often interchangeable terms.
Trading volatile currency pairs can offer traders higher potential rewards. Although, this increased potential reward does present a greater risk, so traders should consider reducing their position sizes when trading highly volatile currency pairs.
What are the MOST VOLATILE CURRENCY PARTS?
These are the most volatile major currency pairs:
- AUD/JPY (Australian Dollar/Japanese Yen)
- NZD/JPY (New Zealand Dollar/Japanese Yen)
- AUD/USD (Australian Dollar/US Dollar)
- CAD/JPY (Canadian Dollar/Japanese Yen)
- AUD/GBP (Australian Dollar/Pound Sterling)
The major currency pairs EUR/USD, USD/JPY and GBP/USD are more liquid and less volatile than other major currencies. However, emerging market currency pairs such as USD/ZAR and USD/TRY can have some of the highest volatility readings.
MOST VOLATILE CURRENCY AIRS
Majors – AUD/JPY, NZD/JPY, AUD/USD, CAD/JPY, GBP/AUD
Emerging Markets: USD/ZAR/USD/TRY, USD/MXN
Emerging market currencies are highly volatile due to their inherent risk. The chart below gives an example of how volatile emerging market currencies can be, which shows USD/ZAR (US Dollar/South Africa Rand) exploding nearly 25% higher in just over a month’s time. You can find many other examples throughout history of emerging market currency pairs that swing dramatically like this.
HOW ABOUT THE LAST VOLATILE CURRENCY AIRS?
Major currency pairs, which are also the most liquid, tend to be the least volatile. These economies are also more advanced and larger. This increases trading volume and helps to ensure greater price stability. It is not surprising that EUR/USD, USD/CHF, and EUR/GBP are among the most volatile currency pairs due to their high liquidity.
Below is an illustration of the average true range (ATR), USD/CHF. It ranges between 45 and 65 pips. This is a lower average true range than other pairs. One of many ways to determine the currency’s volatility is by looking at its average true range. Bollinger Band width is another popular technical indicator used to measure volatility.
