What Are The Most Volatile Forex Currency Pairs?

Volatile forex pairs offer exceptional opportunities for forex traders to profit from dramatic price movements in the currency market, though they come with increased risk exposure. Learn what makes a pair volatile, the currency pairs with the highest volatility historically and how to trade them.

What is volatility?

Forex volatility measures how dramatically currency values fluctuate in the forex market, with highly volatile pairs experiencing significant price swings. It's often measured by calculating a currency price's standard deviation from its mean, with volatile currencies deviating more often and to larger extents.

Consistently volatile currency pairs are usually less liquid than stable pairs as fewer traders are willing to take on their level of risk. Many forex traders still look to capitalise on their volatility when they trade forex, however.he AUD/JPY pair pits the Australian dollar against the Japanese yen, one of the traditional major currencies. Understanding the level of volatility in different currency pairs can help you gauge risk and determine appropriate position sizes as a trader.

What makes a currency pair volatile?

Currency pair prices are driven by a wide range of factors which may affect their volatility, including:

• Economic data, such as inflation, gross domestic product (GDP) and employment figures
• Trade, including import and export habits, partnerships and trade wars
• Political news and events, from elections to instability and new policies
• Monetary policies, particularly interest rates
• The market sentiment of investors and traders

Volatile currencies are generally affected by many of the same factors as less volatile currencies, just to greater extents at certain times. For example, the British pound became volatile due to the political uncertainty surrounding Brexit.

The lower liquidity of some pairs can contribute to higher volatility too, as it takes fewer big moves from fewer traders to get prices moving. Read more about what drives forex prices.

The pros and cons of volatile currency pairs

The most volatile currency pairs have greater chances of significant price movements in both directions, increasing trade opportunities and potential profits and losses. It's important to understand this heightened risk vs reward dynamic and use risk management strategies to limit your losses.

The low liquidity of many volatile pairs can also make it harder to open and exit positions efficiently, as there are fewer traders in the market. They come with an increased risk of slippage, which can negatively affect a trade's execution price.

But with a well-crafted trading plan and appropriate position sizes, stops and limits, volatile currency pairs offer valuable opportunities for your portfolio. The best volatile currency pairs to trade can be those with relatively strong liquidity, based on the points above.

What are the most volatile currency pairs?

Volatility can affect currencies at different times because of the factors we highlighted above, making it impossible to provide a definitive list of the most volatile currency pairs. However, certain popular pairs have consistently demonstrated high volatility historically.

Generally, exotic currency pairs that feature emerging market currencies are more volatile than major pairs – which combine two currencies from developed economies – due to their relative economic characteristics. Read our guide on currency pair categories for more clarity on their distinctions.

AUD/JPY

The AUD/JPY pair pits the Australian dollar against the Japanese yen, making it one of the most volatile currency combinations in the forex market. It's made interesting by the inverse relationship between the two currencies.

The Australian dollar often appeals to more risk-hungry traders during periods of economic growth. It's known as a commodity currency due to its close links to the price and volume of Australia's major exports, including minerals, metals and agricultural products.

The Japanese yen, on the other hand, serves as a safe-haven currency during economic uncertainty, having shown consistent price stability over several years. This opposing dynamic makes the pair highly sensitive to shifts in the global economic outlook and market sentiment.

NZD/JPY

The NZD/JPY pair combines the New Zealand dollar and the Japanese yen. The New Zealand dollar is another commodity currency, meaning pairs like NZD/JPY have a similar inverse relationship to the AUD/JPY pair.

The value of the New Zealand dollar is closely tied to the price and demand for the country's agricultural commodity exports, including dairy products, meat and wood. Tourism is another major sector to watch and is gradually recovering after pandemic disruption and strict travel policies. Any major changes in these markets can affect the currency's value against the yen.

CAD/JPY

This pair features the Canadian dollar alongside the Japanese yen. Again, the Canadian dollar is classed as a commodity currency, creating another inverse relationship for traders to monitor.

Canada is one of the world's major oil producers and exporters, making its currency vulnerable to changes in the price of oil on the commodity market . Oil prices have been especially volatile in recent times due to concerns about insufficient supply, economic uncertainty and other factors, as highlighted by the World Bank.

What's more, Japan remains a major importer of oil. This means the cost of buying Canadian dollars with yen usually increases when oil prices rise, as it takes more yen to buy the oil the country relies upon.

GBP/AUD

Combining the British pound and the Australian dollar, the GBP/AUD pair has seen high daily volatility relative to other GBP pairs.

The currencies have been correlated historically – meaning their price movements tend to align – due in part to Australia's membership of the Commonwealth of Nations. However, deteriorating trade relations, particularly the US-China trade war, hurt the Australian dollar by impacting exports to China, Australia's largest trading partner.

Added to the Australian dollar's volatility is the British pound's increased price shifts since Brexit.

USD/ZAR

The USD/ZAR pair pits the world's primary reserve currency and most popular currency, the US dollar, against a lower-profile commodity currency in the South African rand.

While not immune to shocks, the US dollar has typically been one of the most stable currencies due to its economic backing. Conversely, the South African rand has seen higher volatility due to political issues as well as shifts in commodity markets.

A key commodity in relation to this pair is gold , one of South Africa's main exports. Gold is priced in US dollars globally, meaning its value is closely correlated to the value of the US dollar. When gold rises in price, the dollar tends to appreciate against the South African rand.

What are the least volatile currency pairs?

The least volatile currency pairs tend to be the four traditional majors: EUR/USD, USD/JPY, GBP/USD and USD/CHF. Many lists of majors extend to include popular commodity currencies: AUD/USD, USD/CAD and NZD/USD.

Pairs including major currencies except the US dollar also commonly feature (EUR/GBP, EUR/CHF and EUR/JPY). EUR/GBP has been among the most volatile major currency pairs since the Brexit vote. Find out more about the major forex pairs.

Regardless, these pairs tend to be the most popular among traders and therefore the most liquid, contributing to their relative price stability. They hail from larger, more developed economies, which generally create and maintain greater demand among investors and traders.

How to trade currency pairs with the highest volatility

There are certain considerations worth making when assessing volatile currency pairs as a trader.

• Understanding volatility measures and triggers that can cause big changes in volatility is important for assessing risk.
• The most volatile currency pairs tend to experience bigger price movements than pairs with low volatility, so reducing your position sizes to reduce risk may be warranted.
• Volatility can also help you judge appropriate levels for stop-loss and take-profit limit orders.

With these precautions in mind, here's how you can get started trading volatile currency pairs with Tradu:

1. Sign up for a live Tradu account online.
2. Choose the volatile pair you want to trade, either from those we've highlighted above or other options.
3. Combine fundamental and technical analysis to study and forecast its price movements.
4. Open, monitor and close your first position with appropriate risk management in place. With CFDs, you can trade volatile pairs in both directions.