The Most Volatile Currency Pairs (& How to Trade Them)

The volatility of a currency pair refers to the frequency and size of its price change over a certain period. Trading volatile currency pairs is potentially profitable, but also tricky. As a beginner forex trader, you should know how to identify volatile currency pairs and drivers of volatility to safely trade volatile currency pairs. 

What is volatility in forex?

Volatility in forex trading measures how often and how drastically a currency pair's prices change over a given period of time. 

Volatility of a currency pair is determined by the size of its price variation or movement. The higher the variation, the higher the volatility. A currency pair that moves by moves by 40-50 pips within a given period will be considered highly volatile, while a pair that moves by 5-7 pips within a period is considered as less volatile. 

In forex, high volatility and high liquidity are the direct opposites. Highly liquid currency pairs traded in large volumes are less volatile, while illiquid currency pairs can be highly volatile.  

Trading a volatile currency pair is risky because the price movement is uncertain and difficult to predict. The price can drastically move against your trade position in a brief period. That is why trading leverage products in a volatile market condition can lead to a considerable loss or high profits. 

It would be best to consider volatility when choosing your currency pair, the size of your trade, and the stop loss and take profit level.

What are volatile currency pairs? 

Volatile currency pairs have high volatility in the forex market and they fluctuate by larger pips within a given period.

Exotic currency pairs are considered the most volatile forex pairs. They are pairs that include one major currency and a currency from an emerging economy like ZAR/ USD and TRY/ GBP. Traders are cautious of trading exotic pairs due to uncertainty surrounding some emerging countries' economies.

Some minor currency pairs are also considered highly volatile due to their low trading volume. Minor currency pairs are the ones that do not include the USD. The minor currency pairs that experience low liquidity and high volatility are pairs that do not have the EUR, JPY, or GBP in them.

Factors affecting volatility in currency pairs

There are several factors that influence currency volatility:

Economic events 

Major market events or economic events in a country can affect its currency and all the currency pairs linked to it. Changes in interest rate, inflation, and commodity prices or the release of significant economic data can drive the volatility of a currency.

Differences in the two currencies

The difference in the economic drivers of the two currencies in a pair can also affect the pair's volatility. For instance, when the currency of a commodity-based economy is paired with the currency of a service-dependent economy, the pair can be volatile due to the difference. 

Interest rates

Significant differences in interest rates between two currencies can also make their currency pair more volatile. 

Top most volatile currency pairs in forex

AUD/JPY

The Australian Dollar against the Japanese Yen can be very volatile due to the negative relationship between the currencies. AUD is tied to a commodity-based economy. Its value is influenced by the fluctuation in the price of its exports, like oil and agricultural products.

On the contrary, JPY is considered a safe haven for traders during high market volatility due to its relatively stable economy, cheap exchange rate, and low interest rate.

JPY is known for its historically low interest rate compared to the frequent increase in the AUD interest rate. Recently the Australian Reserve Bank announced a massive rise in its interest rate by 1.35 percent. 

NZD/JPY

Like AUD/JPY, the New Zealand Dollar against the Japanese Yen can also be volatile. The NZD is backed by a commodity-based economy that entails agricultural produce export. The price of these commodities often affects the exchange rate of  NZD against safe haven JPY.

GBP/ EUR 

The British Pound against the Euro is another volatile pair. The GPB is very sensitive to any significant decisions or votes in the House of Commons. Major geopolitical activities in Europe can also have a substantial impact on the volatility of the pair. 

The recent Ukrainian crisis took a massive toll on the pair and will likely continue fluctuating as long as the tensions continue.

The value of the Euro rose earlier this year when there were reports of progress in the Russia/Ukraine peace talk. However, the currency dropped significantly following fresh evidence of Ukrainian atrocities in Ukraine, which has led to further sanctions levied against Russia.

The bank of England has also been increasing interest rates sporadically to control inflation in the UK.

USD/MXN

The US Dollar against the Mexican Peso is a volatile pair due to the tension between the two countries. Despite past bilateral relations, things have worsened between the two since the Trump administration and it has not improved significantly under the Biden administration either. 

Another reason for the volatility is the Mexican higher interest rate compared to the US, which maintained a lower rate. Lastly, the Mexican economy is backed by oil export, as such fluctuation in oil price greatly affects MXN. 

USD/BRL

The US Dollar against the Brazilian Real is volatile due to frequent price movements between the pair. The Brazilian Real is very volatile because it is backed by an emerging economy that is quite unstable.  Brazil also has a commodity-backed economy, and its currency value is affected by the demand for commodities. 

USD/ZAR

The US Dollar against the South African Rand is an exotic currency pair because South Africa is an emerging economy. The price of the pair often deviates drastically because a gold-dependent economy backs the ZAR. The price of South African gold moves based on the change in the price of  USD because its gold is priced in USD on the world market. 

The higher the price of gold, the higher the appreciation of USD against ZAR. Drastic appreciation of USD relative to ZAR will increase the cost of trading AUD/ZAR.

USD/TRY

US Dollars against the Turkish Lira is also often volatile. Compared to the stable USD, the Turkish Lira is highly volatile due to the high inflation rate and political instability in Turkey. 

What are the least volatile currency pairs?

The least volatile currency pairs include currencies traded in large volumes with small price movements over a given period. Major currency pairs are highly liquid, so they are less volatile. 

The least volatile currency pairs include USD/CHF, USD/JPY, EUR/CHF, and USD/EUR. 

The movement in the price of these pairs is often tiny because both currencies in the pair often move in the same direction. 

Final Words

Currency pair volatility is a critical concept influencing profit and loss in the forex market. Volatile pairs may be a chance to make more profit if you have a high-risk appetite. However, it would help if you put adequate risk management strategies before opening a position.