Volatile currency pairs offer greater opportunities to profit from trades as well as increase your risk exposure. Learn what makes a pair volatile, the currency pairs with the highest volatility historically and how to trade them.
In our market guide, we walk you through:
In the context of forex trading, volatility is the degree to which a currency's value changes relative to others. 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. Lots of traders still look to capitalise on their volatility, however. Understanding volatility can help you gauge risk and an appropriate position size as a trader.
Currency pair prices are driven by a wide range of factors which may affect their volatility, including:
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 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 pairs could be a valuable addition to your portfolio. The best volatile currency pairs to trade can be those with relatively strong liquidity, based on the points above.
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 shown high levels of volatility historically.
Generally, exotic currency pairs – featuring one currency from an emerging market – are more volatile than major currency pairs – combining two currencies from developed economies – due to their relative economic characteristics. Read our guide to currency pair categories for more clarity on their distinctions.
The AUD/JPY pair pits the Australian dollar against the Japanese yen, one of the traditional major currencies. 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, traditionally acts as a safe haven in the face of 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.
The NZD/JPY pair combines the New Zealand dollar and the Japanese yen. The New Zealand dollar is another commodity currency, meaning the pair has 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.
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.
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, the Australian dollar was hurt by the ongoing US-China trade war, which impacted Australian exports to China, its largest two-way trading partner.
Added to the Australian dollar's volatility is the British pound's increased price shifts since Brexit.
The USD/ZAR pair pits the world's 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.
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.
There are certain considerations worth making when assessing volatile currency pairs as a trader.