The degree of fluctuation in currency exchange prices over a certain period is referred to as currency volatility. More stable majors show smaller variations in price, whereas highly volatile pairs frequently see huge price volatility. For forex traders, volatility brings opportunity as well as risk. Large fluctuations raise the possibility of profits, but they also raise the risk of steep losses. It is necessary to comprehend the usual market behavior of currency pairings to select the appropriate ones. This article examines a few of the most volatile currency pairs and the variables behind their erratic price movements.
Majors to Watch
Even among the most liquid and widely traded major pairs, some stand out for larger daily fluctuations. The British pound and Australian dollar inparticular see periods of heightened volatility.
GBP/USD (British Pound vs. US Dollar)
With its position as the fourth most traded currency in the world, the GBP is very liquid. But the pound whipsaws due to periods of uncertainty brought on by political events. Severe price fluctuations were caused by the Brexit talks and the conditions of the UK’s future relationship with the EU. Unexpected economic news can also cause volatility in the GBP because the UK frequently balances growth and inflation. Investors need to keep a close eye on data releases and domestic political developments that might cause volatility.
AUD/USD (Australian Dollar vs. US Dollar)
Because Australia relies on the export of commodities, the Aussie dollar has a strong correlation with both global risk sentiment and commodity prices. The risk-sensitive AUD usually falls when market worries rise. Positive news about commodities also strengthens the currency. It is also extremely susceptible to Chinese economic statistics and trade issues between the US and China. Since China is Australia’s top export destination, any indications of a slowdown may cause the AUD to fluctuate. Accelerated changes are observed in the currency pair in response to significant economic releases from China and Australia.
Emerging Market Pairs Dominate
While some major pairs display periods of elevated price action, emerging market currencies reign as the most inconsistent. They face a multitude of domestic and external influences creating recurring bouts of volatility. Politics, inflation, monetary policy shifts, and current account dynamics drive these currencies’ unpredictability.
USD/MXN (US Dollar vs. Mexican Peso)
MXN uncertainty is fueled by geopolitical uncertainties related to Mexico’s relationship with the United States and domestic security challenges. The peso is closely linked to both petroleum prices and tensions in global trade due to Mexico’s heavy reliance on oil exports. In a risk-off flight, any headline risk about US-Mexico ties, the crime environment, or oil weakening drives the USD/MXN sharply higher. It is one of the most volatile currency pairs in the world.
USD/ZAR (US Dollar vs. South African Rand)
Dramatic ZAR gyrations are a result of South Africa’s political and economic turmoil. Investors get uneasy due to the spread of radical left policy initiatives and corruption scandals. Downgrades in credit ratings exacerbate market volatility. In addition, South Africa is dealing with growing unemployment, debt loads, and a limited export market that is dependent on commodities. The rand is impacted by the government’s capacity to solve issues and spur economic growth.Riskier, higher-yielding currencies, such as the ZAR, depreciate disproportionately versus safe-haven currencies during periods of risk aversion.
USD/TRY (US Dollar vs. Turkish Lira)
Turkey’s struggling economy and unorthodox monetary policies make the lira one of the planet’s shakiest currencies. Persistent high inflation, a wide current account deficit, and overdependence on hot money inflows poison investor sentiment. Tight US monetary policy and rising US Treasury yields also drained much-needed foreign capital from emerging markets. The lira collapsed in 2018, at one point nosediving over 40% against the greenback within weeks. Political risks from domestic security issues and strained US-Turkey relations further feed TRY volatility.
Other Notable Pairs
Additional emerging market currency pairs like USD/RUB (Russian Ruble), USD/IDR (Indonesian Rupiah), USD/BRL (Brazilian Real), and USD/INR (Indian Rupee) exhibit elevated volatility compared to majors. China’s renminbi also sees periods of accelerated movement relative to developed peers amid US trade tensions and threats of currency manipulation allegations. Even typically stable Nordic currencies like USD/NOK (Norwegian Krone) can swing widely on sudden oil price fluctuations or monetary policy surprises. Overall, political, economic, and financial stability disparities versus advanced peers underlie most emerging market currencies’ unpredictable nature.
Conclusion
In summary, currency volatility provides both risk and trading prospects but requires a tailored approach. Political and economic instability disproportionately impacts emerging markets and commodity-linked currencies versus developed majors. Certain technical market structures like low liquidity, extended range-bound phases, and leverage also amplify irregular movements. Understanding each pair’s behavior patterns and catalysts helps mitigate risks when volatility spikes. Proper money management including position sizing, stop-losses, and trend-following techniques enables profiting from fluctuations while staying in the game long-term. While unstable, the most volatile currency pairs offer volatility and rewarding trading prospects when approached strategically.
