FX volatility: the most volatile currency pairs

Originally posted on the ETX Capital blog on 22/06/2016

Forget the Brexit vote — there are plenty of other reasons why FX volatility could rise

From the Brexit vote to the Federal Reserve and China, there are plenty of reasons why foreign exchange markets have been especially volatile of late.

Emerging markets are susceptible to Fed interest rate speculation, while the gyrations in China’s yuan was at the root of the August market swoon and the sell-off at the start of 2016. The US dollar is trading on Fed rate expectations more than ever as investors guess which way the central bank is leaning. All this creates a more febrile atmosphere in FX markets than at any time since Ben Bernanke’s taper tantrum.

Here’s the look at some of the most volatile currency pairs in 2016 and what might be affecting them. More volatility makes for greater opportunity but also increased risk.

GBPUSD

Sterling has had a rocky ride in the run-up to the EU referendum, pushing cable into more volatile trading than it’s accustomed to. The pair is usually less volatile than most, but the exceptional circumstances of the Brexit vote drove bigger intra-day price swings. GBPUSD volatility was rising steady in the months before the vote, with the average daily range up well above 1%, versus a longer-run average below 0.9%.

GBPJPY

Sticking with sterling, and a currency pair that is well known for its volatility is the pound-yen cross. Known as the Guppy, it’s also sometimes called the ‘Dragon’ and the ‘Widow-Maker’ — expect a wild ride with this pair at any time of year.

In the week leading up to the EU referendum there was even more movement than usual — average daily swings of 1.8%, versus a 52-week average of 1.4%, which is still mightily high.

As the Bank of Japan waits to unleash more stimulus and traders look to see if the Bank of England has room to cut or raise rates in the coming months, the chances are guppy will stay as volatile as ever.

EURNZD

The euro-kiwi cross is another reliably volatile pair. Over the last 52 weeks, average daily moves of 1.6% have been seen, although in the last month before the EU referendum there was a calmer tone in the market.

Regular moves of between 150–200 pips is because the pair is relatively illiquid and the two currencies are components of two highly liquid pairs — EURUSD and NZDUSD. Effectively the moves in this pair are down to the swings in the two majors, meaning there is ample opportunity for hefty swings.

NZDJPY

Over the last six months, average daily moves in NZDJPY have topped 1.7%, making it one of the most volatile currency crosses in the forex market. Again this is a fairly minor pair made up of the components of two majors — NZDUSD again and USDJPY.

GBPNZD

Volatility for GBPNZD has been high, at over 300 pips on average over the last 52 weeks. To put that in perspective, it’s 4 times the level for the least volatile pairs in terms of pips. Note that % volatility can vary versus pips because of the different values of pips between pairs.

….And the least volatile currency pairs

The least volatile currency pairs are among the most heavily traded, but it’s not just liquidity that matters. EURGBP, NZDUSD and EURCHF usually see the calmest trading but as with anything this can change. For example, when the SNB removed the peg to the euro the EURCHF pair went wild.

Added market volatility means increased opportunity but also more risk. To reflect this, ETX Capital may be increasing margin rates on certain markets.