Want to start trading forex but not sure which currency pair to pick? Discover why volatility is the most important factor you should consider in our complete guide to the most volatile currency pairs.
As a forex trader, one of the most important decisions you’ll need to make is which currency pairs you want to trade. There’s no right or wrong answer — but the decision you make will influence everything from your trading strategy to your risk management.
One factor which you should always consider when choosing your currency pair is volatility. Although highly liquid markets such as the foreign exchange market (also known as forex or FX) usually have lower levels of volatility, there are many reasons why certain currency pairs are more volatile than others.
The volatility of your currency pair will affect almost every aspect of your forex experience. Trading more volatile pairs can mean bigger profits, but it can also mean bigger losses. As a result, you’ll need to balance the potential gains against the increased risks.
Ready to find out what the most volatile currency pairs are? In this article, we’ll guide you through the top 10 most volatile currency pairs and explain how volatility can shape the forex market.
What Are Forex Currency Pairs?
Forex is the biggest financial market in the world. According to the Bank of International Settlements, its average daily trading volume is around $5.2 trillion. This trading volume is generated by the exchange of currency pairs — the name given to a pair of currencies which are bought and sold simultaneously.
Each currency pair is made up of a base currency and a quote currency. The value of a currency pair is determined by how many units of the quote currency are equal to 1 unit of the base currency.
For example, let’s say you’ve decided to trade the world’s most popular currency pair: EUR/USD. In this situation, the base currency is EUR because it comes first in the pair. The quote currency is USD, because it comes second. You would need to know the price of both the base currency EUR (which is known as the bid price) and the quote currency USD (known as the ask price) in order to work out whether this pair is worth trading.
The difference between the bid and ask price is called the spread, and you can work this out by subtracting the bid price from the ask price. These prices are usually given to four decimal places because the variations in value can be incredibly small. This means that spreads are often very narrow. However, as FX traders usually trade such large amounts, even modest spreads can rapidly add up.
What Is Volatility?
Volatility is a word that’s used a lot in the world of trading. Before we take a closer look at the most volatile currency pairs in forex, it’s important to understand exactly what volatility means and how it can be measured.
Put simply, volatility in forex is the extent to which your currency pair fluctuates in value. Traders and investors use this information to predict breakouts and other investment opportunities. The most volatile currency pairs will have undergone a lot of price movements within a certain period. Less volatile currency pairs will have undergone smaller price movements.
In forex, price movements are often measured in pips. This stands for percentage in point (or price interest point) and is used to represent tiny shifts in value. In general, a pip can be thought of as the fourth decimal place in a spread — for example, $0.0001.
Factors which affect volatility include interest rate differentials and geopolitics. For commodity currencies such as AUD or NZD, the value of exports and imports will also affect volatility.
What are The Most Volatile Currency Pairs in 2023?
After conducting extensive research and analysis of the currency market, we found the following to be the most volatile forex pairs to trade in 2023.
One of the most volatile currency pairs is the Australian dollar and Japanese yen. Commodity currencies are some of the most volatile on the market. This is because the value of exports can change quickly based on external factors.
By contrast, the yen is one of the least volatile currencies. In fact, investors often look to JPY to bring stability to an otherwise risky portfolio. The inverse relationship between AUD and JPY gives rise to high volatility, making it a popular choice amongst traders who are looking to cash in on price fluctuations.
The relationship between the New Zealand and Japanese yen is similar to that of AUD/JPY. This is because NZD is also a commodity currency, with its value mainly tied to exports of meat, dairy products, eggs, honey, and wood. When any of these products change in price, it can affect the volatility levels of NZD/JPY.
Although historically not one of the most volatile currency pairs, the British pound and the Euro have become increasingly volatile since the Brexit vote in 2016. As leaving the European Union will undoubtedly affect Britain’s economy, investors have been keen to open a position on the currency pair at key points during negotiations. This has included the defeat of Theresa May’s Brexit deal and any major votes in the House of Commons.
Much like AUD/JPY and NZD/JPY, there is an inverse relationship between the Canadian dollar and Japanese yen. This is because CAD is also a commodity currency, this time strongly linked to the price of oil. As this price increases, the cost of purchasing CAD with JPY increases too. Japan imports a lot of its oil from Canada, so this means they must convert more yen into Canadian dollars as the price of oil continues to rise.
If you’re interested in trading CAD/JPY, it’s crucial to monitor the oil markets and preempt any factors which could cause sudden price fluctuations.
Like GBP/EUR, the British pound and Australian dollar have had a historically stable relationship. However, the recent trade war between the US and China has affected the price of AUD. Australia has previously relied on China as a major trading partner — but since the conflict with the United States, its trade links have been disrupted. This means Australian exports have fallen in value, destabilising its once correlated relationship with GBP.
The US dollar and South African rand is also one of the most volatile currency pairs. The key reason behind this is that South Africa is one of the world’s main exporters of gold. On the global marketplace, gold is typically priced in USD. As a result, the price of gold is highly dependent on the state of the dollar. As the price of gold increases, more ZAR is needed to purchase USD.
The US dollar and South Korean won have a highly inflated exchange rate, making price fluctuations common. Many investors consider this volatile currency pair to be an easy win — and as more people trade USD/KRW, the greater this volatility becomes.
The Brazilian real (BRL) is known as an exotic currency, which means it comes from an emerging market. Exotic currencies are usually highly volatile, so currency pairs which include an exotic currency are usually volatile too.
Due to the political instability in Turkey, the Turkish lira (TRY) can be incredibly volatile on the global market. Its value against the USD has fluctuated hugely at key political moments, such as elections and coups.
The final pair in our list of the top 10 most volatile currency pairs is the US dollar and Mexican peso. The US and Mexico have had a rocky relationship ever since the election of Donald Trump in 2016, but the recent implementation of tariffs on Mexican exports has caused the currency pair to become more volatile than ever.
- Volatility is an important factor to consider when choosing your currency pairs in forex
- Trading the most volatile currency pairs could mean bigger profits, but it also means higher risk
- Liquidity is usually inversely proportional to volatility
- Price variations are measured in pips (percentage in points)
- Commodity currencies and exotic currencies are some of the most volatile on the market
- Interest rate differentials and geopolitics will affect the volatility of a currency pair
- The top 10 most volatile currency pairs often contain AUD and NZD, which are commodity currencies
- JPY is seen as a ‘safe haven’ for investors because of its low volatility
Trading the most volatile currency pairs can be rewarding but risky. Forex beginners are usually recommended to stick to the major currency pairs which are easier to predict. However, breaking into more volatile options can be an excellent way to diversify your portfolio. With the right risk management, these top 10 most volatile currency pairs could have huge potential if you play your cards right.