Volatility can be down to all kinds of factors – from unwelcome trade figures to surprising election or referendum results. More volatility can be something of a mixed blessing – it allows for more opportunities but also for many more risks.
Sterling and the dollar were tricky before the EU referendum and trading was more volatile than usual. Most people did not expect the Brexit result and the result was bigger intra-day price swings. For months before GBPUSD volatility was rising with the average daily range up well above 1%, versus a longer-run average below 0.9%.
A currency pair that is well known for its volatility is the pound-yen cross. Forex traders have assigned quaint nicknames to this pair including the Guppy and also the ‘Dragon’ and the ‘Widow-Maker’ – experience tells us that volatility can be expected from this pair at any time of the year.
Unsurprisingly this pair suffered even more volatility immediately prior to the e EU referendum with average daily swings of 1.8%, versus a 52-week average of 1.4%, which is still extremely high. Factors in both countries seem to predicate that in the year ahead we can expect only further volatility from the guppy.
The cross between the Euro and the Kiwi (New Zealand dollar) tends to be unpredictably volatile. It is not unusual to see daily movement in the region of 1.6%. One can see regular moves of between 150-200 pips is because the pair is relatively illiquid and the two currencies are composed of two highly liquid pairs – EURUSD and NZDUSD. The reasons for this volatility is the nature of the “parent” pairing.
This pairing has experienced high volatility – three hundred pips on average over the past year – which to put in perspective is four times the level of volatility for the least volatile pairing. It should be noted that percentages of volatility can vary versus pips because of the different values of pips between pairs.
There is also marked volatility in the relationship between the pound sterling, still struggling to come to terms with Brexit and the Australian dollar.
Cover Image via Midhama Midhama