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The Most and Least Volatile Currency Pairs in 2020
You are probably familiar with the concept of “volatility”. If not, we recommend you to get more information on the subject before reading this article.
Here we will talk about the most volatile currency pairs in the Foreign Exchange (Forex) market in 2020.
We should note that by definition, volatility tends to change over time and is not a constant.
Volatility Is Relative
If you have ever traded in the Forex market or at least watched price movements from the sidelines, you might have noticed that the prices move non-linearly on the chart.
There are times when the currency price stands still or moves within a very narrow range. In this case, we talk about the low volatility in the market.
On the other hand, when key economic data are published or officials make a speech, the market price makes sharp and strong movements. So, here we can see an increase or even a spike of volatility.
To illustrate the non-constant nature of volatility let’s take a look at the Forex Volatility Calculator –http://investing.com/tools/forex-volatility-calculator.
All you need to do before you start using the tool is to enter the period in weeks, over which you want to measure the volatility.
Let’s take NZD/USD (New Zealand vs. US dollar) as an example. On the website, mentioned above, we select the four weeks to calculate the volatility. The results are displayed in three diagrams:
These diagrams show the average daily volatility of the NZD/USD pair since July 1. They also show an average weekly, daily and hourly volatility of the pair.
Based on all three diagrams we can conclude that volatility tends to change during any period.
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The hourly volatility diagram for NZD/USD, which peaks at 12 and 21 o’clock (GMT), is of particular interest. It fully coincides with the time of economic data releases for the USA and New Zealand. It also confirms the thesis on volatility increase upon major economic data releases mentioned at the beginning.
Volatility changes can be observed for all currency pairs. You can select any pair and see the statistics over different periods.
What Does Volatility Depend On?
What does the volatility of any currency pair depend on?
The main reason for the volatility is liquidity. A classic rule states that: the higher the liquidity is, the lower is the volatility, and vice versa.
Liquidity is the amount of supply and demand in the market. It means that the larger the supply and demand are, the harder it is to get the price moving.
According to that rule, we can conclude that exotic currency pairs are the most volatile ones in the Forex market because their liquidity is often lower than that of major pairs.
Volatility often occurs during major economic data releases as well, so it may be useful to download and install MT4 news indicator:
It can help to protect yourself against the unexpected market activity.
Let’s use statistics to verify the previous statements.
Table of The Most Volatile Currency Pairs
For our study let’s take seven major, cross, and exotic currency pairs, and draw up a comparative table based on the obtained data:
The Most Volatile Currency Pairs Table (data from 01-06-20)
The table shows that today the most volatile Forex pairs are exotic ones. Namely, USD/SEK, USD/TRY, and USD/BRL. All of them move on average for more than 400 points per day.
The volatility of the major currency pairs is much lower. Only GBP/USD moves for more than 100 points per day. AUD/USD turned out to be the least volatile currency pair.
As for the cross rates, GBP/NZD, GBP/AUD, GBP/CAD, and GBP/JPY are the pairs with the highest volatility. All of them move on average for more than 100 points per day.
CAD/CHF, EUR/CHF, AUD/CHF and CHF/JPY are the less volatility Forex pairs among the cross rates. The amplitude of their movements doesn’t exceed 60 points per day.
Based on these statements, the reader may conclude that trading the exotic currency pairs or cross rates promises large profits. However, it isn’t quite that simple.
Indeed, the range of exotic pairs’ movements is much broader than that of the major ones. However, such high volatility is a result of low liquidity, and trading the low liquidity currency pairs carries particular risks for a trader.
The fact is that various methods of technical analysis might not work in such situations. That is, if you decide to trade, say, USD/SEK or GBP/NZD, your analysis may not work as effectively as, for example when trading EUR/USD. Also, technical analysis patterns might generate false signals.
This is because the psychology of the market behavior in its most liquid form makes up the backbone of technical analysis. If the liquidity of a trading instrument is lower, the validity of technical analysis comes under question.
The second problem a trader can face when trading the volatile financial instruments is a wide spread (additional trading expenses).
Of course, we won’t discourage you to trade the low liquidity currency pairs. However, our task is to warn inexperienced traders and newbies that the risk of such trading is higher than that of trading the classic currency pairs.
Most Trendy Currency Pairs
The most popular way to make money from Forex trading is to exploit strong trends. However, your favorite currency pair(s) will not always deliver the persistent moves you’re looking for.
Let’s see which currency pairs are most suitable for trend following at the moment.
Although trend identification has quite a bit of subjectivity to it, there are concrete methods to spot good trending behavior. Of course, the time frames you trade on will influence your opinion on the direction of the prevailing trend (if there is an existing trend).
A trader who only studies 5-minute charts will often disagree with someone who looks at daily and 4-hour charts. Different methods and indicators are also used to establish whether currency pairs are trending.
Then, there are different types of trends. Some are volatile (jagged) and some are smooth. Some are forceful and some are weak.
Trending currency pairs study
In this article, we study the daily time frames of 10 different currency pairs.
We also look at certain exponential moving averages and measure price fluctuations over 4 different time periods.
We also take note of swing points as we expect to see higher highs and higher lows in an uptrend and lower lows and lower highs in a downtrend.
To give you relevant information that applies to the current market conditions, we mostly look at data and price action for the last 12 months.
|Currency Pair||% Change Last 2 Weeks||% Change Last 3 Months||% Change Last 6 Months||% Change Last 12 Months|
Price changes are measured from different dates up to 2020/05/10.
This table contains some of the most important and liquid currency pairs you can trade, plus two exotic pairs.
You will not find the USD/CHF major pair in this table because it has been trading in a range for several years and is generally inclined to being range-bound. The retail sentiment is also ‘flat’ on the USD/CHF, which tells us that a really strong trend will probably not be seen for this pair soon. So we didn’t even bother looking at the USD/CHF.
Certainly, we can not use this table as a stand-alone indicator to gauge the trend strength of these currency pairs. However, if we notice that a specific currency pair has made a substantial move during a certain time period, we have a reason to investigate that pair in more detail. Furthermore, if the direction of that substantial move agrees with the market direction of the previous periods, there is a pretty good chance that a healthy trend is in play.
In our table, there are 3 pairs (marked in red) that have moved in the same direction in all 4 time periods. They are:
By briefly scanning through this table, an experienced trader will notice that market volatility has generally been low over the last year. Many of these pairs are also relatively close to where they were a year ago. So, when we look at the charts of these pairs, we shouldn’t expect to see the massive trends that many Forex traders dream of. Nevertheless, let’s analyze the daily time frames of these 3 trending currency pairs to gauge the quality of their move.
In this daily chart of the EUR/JPY, the four exponential moving averages testify of a decent bearish trend. However, the trend is very jagged, with steep pullbacks having occurred regularly. During the last 12 months, there have been some really good opportunities to short this pair, despite a few periods of sideways consolidation.
Pay attention to the Ratios indicator where we can see prevailing Long positions by retail traders. So we can expect a downtrend in the near future.
When we analyze the recent price waves and swings of the EUR/JPY, we find lower swing highs and lower swing lows. Of course, we need to use some discretion here because the trend is pretty rough and bumpy. Here is the same chart that illustrates the price swings:
The NZD/USD is also pretty bearish. Our 4 exponential moving averages are perfectly aligned, with the 20-EMA being the nearest to the price, followed by the 50, 100, and 200. The NZD/USD has been one the best movers (percentage-wise) during the last two weeks, so the predominant bearish trend is still pretty vigorous.
Just like the EUR/JPY, the NZD/USD has also printed some jagged price action over the last year or so. Periods of consolidation and counter-trend moves have often interrupted the move lower. Once again, there were numerous opportunities to successfully short this pair.
An analysis of the recent price swings of the NZD/USD reveals the characteristics of a healthy downtrend – lower highs and lower lows. Take a look at this chart:
During the last 12 months, the AUD/USD has declined more than 7%, which is more than most of the other pairs in our table. It is easy to see that the pullbacks against the predominant downtrend were generally less aggressive than those on the EUR/JPY and NZD/USD.
Just like with the two other pairs we looked at, the 4 exponential moving averages are also aligned on this daily chart of the AUD/USD. This indicates that a strong selling pressure is still prevalent in this pair.
Let’s take a look at how the price swing points have unfolded on the AUD/USD over the last year or so:
Once again, the characteristics of a downtrend are seen in this chart – lower highs and lower lows.
Of all the pairs listed in our table, the EUR/JPY, NZD/USD, and AUD/USD are the most trending currency pairs at the moment. Although these trends are not extremely forceful, they have produced numerous trading opportunities during the last 12 months.
But What About the Other Pairs? Are there any other pairs good for trend following?
Of the other pairs in our table, the EUR/USD is also trending lower, although at a very slow pace.
The GBP/USD is heading lower but is still caught in a wide range on the daily time frame.
The USD/JPY also lost some ground lately but the overall picture remains sideways.
The USD/CAD is struggling to reach the high that was set at the beginning of 2020. Although the 20, 50, 100, and 200 EMAs are aligned and sloping upwards, the pair is just inching higher. Nothing spectacular.
The GBP/JPY is moving lower but is still caught in a wide range.
Although the USD/ZAR is 15.28% higher than 12 months ago, the pair is in the middle of a wide range that has contained the price for several months.
As you may have noticed from the numbers in our table, the USD/MXN is caught in consolidation and is not suitable for trend traders at the moment.
Forex Currency Pairs: The Ultimate 2020 Guide + Cheat Sheet
You would never buy a house without understanding the mortgage, right? Yet when it comes to the Forex market, many traders forget to familiarize themselves with the currency pairs they’re buying and selling.
I’ll admit that trading currencies is quite different from purchasing a home, but the idea is the same – you need to understand where your money is going.
How do I know that many traders skip this step?
In addition to receiving hundreds of emails every month, I was once a beginner too.
Sure, I understood the very basics of currency pairs before I opened a live trading account, but I certainly didn’t know as much as I should have.
So to save you from making some of those same mistakes, I’ve put together a crazy-detailed lesson of everything you could want to know about Forex currency pairs.
My goal with this lesson is to take you from understanding the basics to becoming a complete currency guru. So whether you’ve been trading for two days or two years, I can all but guarantee that you’ll learn something new.
As always, be sure to leave a comment at the bottom of this post and don’t forget to share it with your friends.
Let’s get down to business!
Anatomy of a Currency Pair
Before we get into the nitty-gritty, it’s important that you understand what a currency pair is and how it moves.
As you might have guessed from its name, each pair involves two currencies. In this way, the value of one currency is compared to and is thus relative to the currency it’s paired against.
If that sounds confusing don’t worry, it will be abundantly clear by the time you finish this section.
The first currency in the pair is the “base currency” and the second is the “quote currency.”
This naming convention is the same regardless of the currency pair you’re trading.
You get the idea. Now let’s explore the two terms in greater detail.
The base currency is the one that is quoted first in a currency pair.
Using EURUSD as an example, the Euro would be the base currency. Similarly, the base currency of GBPUSD is the British pound (GBP).
By process of elimination, you know that the quote currency is the one that comes second in a pairing.
For both the EURUSD and the GBPUSD, the US dollar is the quote currency.
You Can’t Make Money if They Don’t Move
There are essentially two ways in which any currency pair can move higher or lower.
- The base currency can strengthen or weaken
- The quote currency can strengthen or weaken
Because the Forex market never sleeps and thus currency values are always changing, both the base currency and quote currency are in a constant state of flux.
In our example, if the Euro (base currency) were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal.
If on the other hand, the US dollar (quote currency) were to strengthen, the EURUSD would fall. And if the USD weakened, the currency pair would rally as the Euro would gain relative strength against its US dollar pairing.
All of the hypotheticals above assume that nothing else has changed for the pair.
Here’s a visual of the relationship. In this instance, the Euro is strengthening against the US dollar.
Not surprisingly, the next example is the EURUSD in a bear market. Here the Euro is weakening against the US dollar.
Pretty simple, right?
If you’re already familiar with the content so far, don’t worry, we’ll be getting into more advanced territory shortly.
As you can imagine, the velocity of any move depends on the relationship between the two currencies. For instance, if one is strengthening while the other is weakening, the move will be more pronounced than if only one currency is on the move.
Last but not least, it’s important to remember that the relationship between the base and quote currency is always changing. So just because the EURUSD is rallying in the current session doesn’t mean it will be tomorrow or even one hour from now.
The Dynamics of Buying and Selling Currencies
One area that often confuses traders is the idea of buying and selling currencies.
In the stock market, you can either buy (and sometimes sell) shares of stock. There are no pairings, and the value of one stock is not dependent on that of another.
However, in the Forex market, all currencies are paired together. So when you’re ready to place a trade, are you buying or selling?
The answer is both.
For example, if you sell the EURUSD (also referred to as going “short”), you are simultaneously selling the Euro and buying the US dollar.
Conversely, if you buy the EURUSD (also referred to as going “long”), you are buying the Euro and selling the US dollar.
If not, feel free to review this section as many times as necessary.
To clarify, this does not mean you have to place two orders if you want to buy or sell a currency pair.
As a retail trader, all you need to know is whether you want to go long or short. Your broker handles everything else behind the scenes.
There’s also only one price for each pair. Remember that a currency’s value depends on the currency sitting next to it.
Alright, so we’ve breezed through several terms and concepts when it comes to trading Forex currency pairs.
At this point, you should have a firm understanding of what a currency pair is as well as the dynamics of buying and selling.
If not, feel free to review the material above as many times as necessary before moving on.
Now it’s time for the meat and potatoes of the lesson.
Currency Baskets (Majors, Minors and Crosses)
This is my favorite part because now we get to dig into the various classifications of currency pairs. And later, I’ll uncover the pairs that are affected by changing commodity prices as well as a few of the safe haven currencies.
Don’t know what those are?
No problem. By the time you finish this section, you’ll be a currency guru!
Major Currency Pairs
Major currency pairs are to the Forex market what Apple and Amazon are to the stock market.
They are by far the most popular and therefore the most liquid.
|Currency Pair||Countries||Currency Name|
|EUR/USD||Eurozone / United States||Euro / US dollar|
|USD/JPY||United States / Japan||US dollar / Japanese yen|
|GBP/USD||United Kingdom / United States||British pound (sterling) / US dollar|
|USD/CHF||United States / Switzerland||US dollar / Swiss franc|
|USD/CAD||United States / Canada||US dollar / Canadian dollar|
|AUD/USD||Australia / United States||Australia dollar / US dollar|
|NZD/USD||New Zealand / United States||New Zealand dollar / US dollar|
Every major currency pair includes the US dollar. So if you ever see a pair that doesn’t involve the USD, it isn’t a major.
Everyone wants to trade the major pairs listed above. Mostly because, well, they’re the most popular, and who doesn’t want to put their money in the most traditional assets?
But here’s the thing…
The majors are not the end all be all when it comes to trading Forex.
It’s important to remember that there are dozens of pairs at your disposal.
While it is true that these are the most traded and are therefore the most liquid, popularity doesn’t pay the bills, favorable setups do. And unless your trading account is the size of Warren Buffett’s bank account, you don’t need the majors.
What in the heck am I talking about, you ask?
I’m referring to the well-known fact that everyone wants to trade the major currency pairs regardless of what the price action looks like at any given time.
For example, if the EURUSD has been choppy for weeks and isn’t producing anything favorable, you’re probably better off looking elsewhere.
But instead what I see quite often are folks trying to force trades on the EURUSD, GBPUSD, etc. simply because it’s what everyone else is doing.
This is one reason why I’m not an advocate of mastering one or two currency pairs at a time. In fact, making this mistake can quickly lead to forcing trades and overtrading.
I’ll expand on this idea shortly.
Minor Pairs and Cross Currencies
So if the major pairs include the US dollar, we can infer that minor currency pairs are those that do not include the US dollar.
Pretty straight forward, right?
Now, here’s where some traders get confused. The truth is, there are far more currency crosses than there are minor pairs.
A lot of folks make the mistake of thinking that a minor to be any pair that doesn’t include the US dollar.
A currency cross is any pair that doesn’t include the US dollar.
Minor currency pairs, on the other hand, make up a fraction of the crosses that are available for trading.
In other words, all minors are crosses, but not all crosses are minors.
Let’s define these two terms before we go on.
Cross Currency Pairs (A.K.A Minors)
It’s time to clear up some confusion I see quite often around the web regarding minor pairs and currency crosses.
A currency cross is any pair that does not include the US dollar. As such, these pairings don’t offer nearly as much liquidity as the majors we discussed earlier.
A minor pair, on the other hand, is a major currency cross. As you now know, a cross doesn’t include the US dollar. Therefore, these minors are comprised of the Euro (EUR), British pound (GBP) and the Japanese yen (JPY).
If it’s all a little fuzzy at the moment, don’t worry. The tables below should help to clear things up.
|Currency Pair||Countries||Currency Name|
|EUR/GBP||Eurozone / United Kingdom||Euro / British pound (sterling)|
|EUR/AUD||Eurozone / Australia||Euro / Australian dollar|
|EUR/NZD||Eurozone / New Zealand||Euro / New Zealand dollar|
|EUR/CAD||Eurozone / Canada||Euro / Canadian dollar|
|EUR/CHF||Eurozone / Switzerland||Euro / Swiss franc|
Japanese Yen Crosses
|Currency Pair||Countries||Currency Name|
|EUR/JPY||Eurozone / Japan||Euro / Japanese yen|
|GBP/JPY||United Kingdom / Japan||British pound (sterling) / Japanese yen|
|AUD/JPY||Australia / Japan||Australian dollar / Japanese yen|
|NZD/JPY||New Zealand / Japan||New Zealand dollar / Japanese yen|
|CAD/JPY||Canada / Japan||Canadian dollar / Japanese yen|
|CHF/JPY||Switzerland / Japan||Swiss franc / Japanese yen|
British Pound Crosses
|Currency Pair||Countries||Currency Name|
|GBP/AUD||United Kingdom / Australia||British pound (sterling) / Australian dollar|
|GBP/NZD||United Kingdom / New Zealand||British pound (sterling) / New Zealand dollar|
|GBP/CAD||United Kingdom / Canada||British pound (sterling) / Canadian dollar|
|GBP/CHF||United Kingdom / Switzerland||British pound (sterling) / Swiss franc|
|Currency Pair||Countries||Currency Name|
|AUD/NZD||Australia / New Zealand||Australian dollar / New Zealand dollar|
|AUD/CAD||Australia / Canada||Australian dollar / Canadian dollar|
|AUD/CHF||Australia / Switzerland||Australian dollar / Swiss franc|
|NZD/CAD||New Zealand / Canada||New Zealand dollar / Canadian dollar|
|NZD/CHF||New Zealand / Switzerland||New Zealand dollar / Swiss franc|
|CAD/CHF||Canada / Switzerland||Canadian dollar / Swiss franc|
But if the major currency pairs get most of the attention and carry the most liquidity, why would anyone want to trade minor currency pairs and especially crosses?
Make no mistake, while the daily volume for these crosses is less than the majors, they are certainly not illiquid by any means.
In fact, many of the major crosses average more daily volume than some stock exchanges.
Remember that the foreign exchange market is the most liquid financial market in the world, so even some of the less popular currencies are extremely liquid.
The exotic currency pairs are the least traded in the Forex market and are therefore less liquid than even the crosses we just discussed.
And while the liquidity of the exotic pairs is more than enough to absorb most orders, the “thin” order flow often leads to choppy price action.
Additionally, the technical analysis we like to use here at Daily Price Action is less reliable. As a general rule of thumb, the more liquid a market is, the more you can rely on the technicals.
So what are these exotic currency pairs, you ask?
|AED||UAE Dirham||ARS||Argentinean Peso|
|AFN||Afghanistan Afghani||GEL||Georgian Lari|
|MYR||Malaysian Ringgit||AMD||Armenian Dram|
|GYD||Guyanese Dollar||MZN||Mozambique new Metical|
|AWG||Aruban Florin||IDR||Indonesian Rupiah|
|OMR||Omani Rial||AZN||Azerbaijan New Manat|
|IQD||Iraqi Dinar||QAR||Qatari Rial|
|BHD||Bahraini Dinar||IRR||Iranian Rial|
|SLL||Sierra Leone Leone||BWP||Botswana Pula|
|JOD||Jordanian Dinar||TJS||Tajikistani Somoni|
|BYR||Belarusian Ruble||KGS||Kyrgyzstanian Som|
|TMT||Turkmenistan new Manat||CDF||Congolese Franc|
|LBP||Lebanese Pound||TZS||Tanzanian Schilling|
|DZD||Algerian Dinar||LRD||Liberian Dollar|
|UZS||Uzbekistan Som||EGP||Egyptian Pound|
|MAD||Moroccan Dirham||WST||Samoan Tala|
|EEK||Estonian Kroon||MNT||Mongolian Tugrik|
|MWK||Malawi Kwacha||ETB||Ethiopian Birr|
|THB||Thai Baht||TRY||New Turkish Lira|
|ZAR||South African Rand||ZWD||Zimbabwe Dollar|
|BRL||Brazilian Real||CLP||Chilean Peso|
|CNY||Chinese Yuan Renminbi||CZK||Czech Koruna|
|HKD||Hong Kong Dollar||HUF||Hungarian Forint|
|ILS||Israeli Shekel||INR||Indian Rupee|
|ISK||Icelandic Krona||KRW||South Korean Won|
|KWD||Kuwaiti Dinar||MXN||Mexican Peso|
|PHP||Philippine Peso||PKR||Pakistani Rupee|
|PLN||Polish Zloty||RUB||Russian Ruble|
|SAR||Saudi Arabian Riyal||SGD||Singaporean Dollar|
While the table above is fairly comprehensive, it is by no means a complete listing of every exotic currency in the world. However, it does cover some of the most popular of the less popular exotics.
But before you rush off to add this basket of currencies to your trading platform, there are a few things you should know.
As I mentioned earlier, these Forex exotics are less liquid than their more standard counterparts. And while most of them can easily support the majority of retail orders, the lack of volume can adversely affect the spread between the bid and the ask.
Also, in my experience, the study of technical analysis works best in highly liquid markets. This is one reason why I made the transition from equities to Forex in 2007.
Because the exotic currency pairs lack sufficient liquidity, at least compared to that of other pairs, the accuracy of technical analysis can suffer. So even if you find a pair that has a favorable spread, the lower volume may adversely affect your trading performance.
Limited Historical Data
At least two or three times a week I scan back several years on a particular currency pair. This is especially true if I’m on the fence about a key support or resistance level.
For those who have always traded the majors and crosses, the ability to view historical data is something you’ve come to expect.
However, if you trade the exotics listed above, you may not have that luxury.
Some of these currencies simply haven’t been around long enough to establish a significant track record.
In other cases, your broker may not offer the data. Remember that these exotics are far less popular than even the crosses, so some brokers decide that storing and updating the data simply isn’t worth their resources.
Choppy Price Action
This is perhaps the number one reason I avoid most exotic currency pairs like the plague.
While you may be able to find a few that have favorable movement, for the most part, they are extremely choppy and volatile currencies to trade.
Here’s an example of ZARJPY. As you know from the currency tables above, that’s the South African rand versus the Japanese yen.
As you can see, the price action above is less than ideal. And keep in mind that the ZARJPY is relatively “mild” in terms of the chop you might see on any given day.
Last but certainly not least is the opportunity cost associated with trading exotic currency pairs.
What does this mean, exactly?
It means that if you were to take a trade on the EURTRY (Euro / Turkish Lira), you’re tying up a portion of your capital that could be used elsewhere. You now have a level of exposure that you didn’t have 5 minutes ago.
As such, you are now somewhat limited in what you can do should a favorable setup arise on a more liquid pair such as the EURUSD or the USDCAD.
Of course, you could make the same case about any position, but with dozens of other currency pairs at your disposal, you certainly have to weigh the opportunity cost associated with trading a less liquid market.
The Three Commodity Pairs (What You Need to Know)
As the name implies, commodity currencies are those that rely on their respective country’s export activities.
Developing countries such as Burundi and Tanzania are among them. However, it also applies to countries such as Canada, Australia, and New Zealand.
Although there are several others on the list, the only commodity currency pairs that you need to know for this lesson are USDCAD, AUDUSD, and NZDUSD.
You should know that the Canadian, Australian and New Zealand dollar are also known as the commodity dollars, or “comdolls.”
Let’s take a look at each pair in detail.
The US dollar versus the Canadian dollar is one of the more sensitive commodity currency pairs. This sensitivity is due to the vast amount of natural resources that flow from Canada, much of which makes its way to the United States.
Among these natural resources is oil, which is a primary export for Canada and one that is vital to the health of the global economy.
In fact, Canada exports over 2 million barrels a day to the US alone. This high dependency on the commodity as an export makes the Canadian dollar vulnerable to fluctuations in the price of oil.
Although the correlation is never static, over the last ten to fifteen years, the Canadian dollar has held a positive correlation to oil of more than 75% on average.
This relationship means that when oil rises the Canadian dollar strengthens. Conversely, when oil depreciates so too does the CAD.
Because the CAD is our quote currency in USDCAD (remember, it’s the second in the pairing), the currency pair has an inverse correlation to oil.
Australia is one of the world’s largest exporters of gold. In fact, as of 2020 the country was the second largest gold producer only second to China.
Here’s a chart showing how the Aussie dollar has tracked gold prices over time.
So as you might expect, just like oil exports heavily influence the Canadian dollar, the Australian dollar is at the mercy of the country’s gold exports.
Why does this matter?
It matters because investors tend to flock to gold during times of economic unrest. And if the Australian dollar tracks gold prices, then there’s a good chance that the Aussie will also capitulate during hard economic times.
But if this is true, why did the AUDUSD plummet during the 2008 global financial crisis?
That’s a great question, and we find the answer once we dig into the “safe haven” status that the US dollar often brings to the table.
During times of economic uncertainty or struggle, investors tend to favor the US dollar. So even though the Aussie was riding the gold wave at the time (which wasn’t very impressive as you’ll see below), the US dollar was strengthening at a faster pace.
The Australian dollar also tends to track equities, so when these markets began to capitulate back in 2008 so too did the AUD.
Remember, all value is relative in the currency market.
Despite the small size of New Zealand, the small island nation has an abundance of natural resources. However, the country’s significant agricultural presence is what attracts the “commodity currency” label.
These resources combined with the massive international trade and it’s little wonder why the New Zealand dollar is affected by global commodity prices.
However, unlike the Canadian dollar or Australian dollar, the NZD isn’t typically tied to the fluctuations of one commodity.
Rather, the currency is affected by a basket of commodities and is one of the top exporters of milk, meat, and fruits.
Safe Haven Currencies: Your Virtual Bomb Shelter
A safe haven is any asset that has a strong likelihood of retaining its value or even increasing in value during market downturns.
One of the most popular safe havens is in the form of a metal rather than a currency. But contrary to popular belief, gold isn’t a great performer during economic uncertainty or even recessionary periods.
During the 2008 global crisis, for example, gold was locked into a range and really only managed to move sideways with slight gains seen towards the end of the recession.
Note: The gray area represents the unofficial start and end of the 2008 crisis
Of course, as you can see from the chart above, the longer-term appreciation of gold as a safe haven can be quite considerable and should therefore not be underestimated.
Swiss Franc (CHF)
In the Forex market, the Swiss franc (CHF) is considered a safe haven currency, hence the reason the USDCHF experienced mixed results during the 2008 period.
Notice how although the US dollar gained against the franc in late 2008, the results weren’t nearly as substantial or lasting as something like the AUDUSD chart above or any one of the yen pairings below.
US Dollar (USD)
The US dollar often enjoys the same “safety net” status, however, when matched up against a more formidable safe haven, the currency tends to move lower during times of economic unrest. The USDJPY chart below is a perfect example.
Remember that if the quote currency experiences heavy appreciation, the pair is likely to move lower over time.
Japanese Yen (JPY)
Last but certainly not least is the Japanese yen, another currency that has a long history of safe haven status.
Notice how the yen crosses below fared during the 2008 meltdown.
As you can see, the Japanese yen appreciated massively against all three of its counterparts above.
Over the years the yen has been one of the more consistent safe haven currencies, which has made it my go-to currency when fear begins to grip global markets.
But just because an asset held its value or appreciated during the last market downturn does not mean it will behave in the same manner in the future.
The ever-changing nature of the financial markets doesn’t offer guarantees such as this. However, the assets mentioned above do have a history of retaining their value when things turn sour.
Know Your Currency Correlations
If you only remember one thing from this lesson, let this be it.
A currency pair’s correlation refers to the similarities shared by various pairings. These commonalities lead to both positive and negative associations.
For example, under normal circumstances, the EURUSD and the USDCHF are negatively correlated. In other words, if the EURUSD ends the day higher by 100 pips, chances are the USDCHF finished the day lower.
An example of two positively correlated pairs would be EURUSD and GBPUSD. In our previous example, if the EURUSD ends the session higher by 100 pips, it’s likely that GBPUSD also ended the day higher.
So you get the idea. Again, pretty basic stuff but yet essential knowledge if you wish you achieve consistent profits in the Forex market.
Why is it so important, you ask?
Because managing risk is your number one job as a trader. And if you aren’t familiar with these currency correlations, you can inadvertently double your risk.
For example, if you sell the EURUSD and buy the USDCHF, you have essentially doubled your risk.
At the same time, if you were to buy both currency pairs, you’ve contradicted yourself. For example, if you sell two negatively correlated pairs, chances are only one of the two trades will be successful.
So what is a Forex trader to do?
It comes down to checking the currency correlation before placing a trade.
Here is the currency correlation table I use.
What’s nice about the chart above is that it’s divided into various time frames. This separation makes it easy to determine how one currency pair correlates to another and if you’re approach makes sense from a risk to reward perspective.
So What Do I Trade? (Top Secret)
Just kidding, it isn’t really top secret. But I will say that this is the first time I’ve publicly announced the currency pairs I trade.
So which pairs are my favorite to trade?
Honestly, I don’t have favorites. I’m an opportunist so rather than favoring particular currencies, I gravitate toward favorable technical patterns.
This is why you’ll often see me commenting on currency crosses over in the daily setups. I enjoy trading the majors, but I certainly don’t discriminate should a compelling setup arise on something less liquid.
With that said, the pairs I started with back in 2007 are highlighted in the table above. These were my go-to currency pairs back then, and many still are today with a particular emphasis on the AUDUSD and the NZDUSD.
Wrapping Things Up
Wow, this lesson is now over 4,000 words. Who knew someone could write so much about Forex currency pairs?
But seriously, I’ve always said that the process of becoming a great Forex trader is more important than the destination. And if you want to become consistently profitable, it’s essential that you understand everything there is to know about the currency pairs you’re trading.
Many traders make the mistake of skipping these necessary steps before putting their hard-earned money at risk.
As they say, knowledge is power. And nothing is more powerful for a trader than understanding the currency pairs that make up the Forex market.
I sincerely hope this lesson has answered any question you may have had. As always, if I missed something, please let me know in the comments section below.
A currency pair is a pairing of currencies where the value of one is relative to the other. For instance, EURUSD is the value of the euro relative to the U.S. dollar.
There are hundreds of currency pairs in existence. The exact number is difficult to come by as some exotic pairs come and go each year.
Major currency pairs (or just majors) are those that include the U.S. dollar. EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, AUDUSD, and NZDUSD are all majors.
Currency crosses (or cross currencies) are the more liquid currencies that do not include the U.S. dollar in their pairing. Note that these are NOT exotics like the Iraqi Dinar (IQD). Crosses include EURGBP, EURCAD, GBPJPY, CADJPY, GBPAUD, etc.
I Want to Hear From You
What currency pairs do you trade? Did I miss anything?
I’d love to hear from you so be sure to drop me a line in the comments section below. I always make it a point to respond.
The best currency pairs to trade in 2020
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The Forex market is the largest in the world and it brings daily turnovers of 4 trillion USD. This means that the Forex market is 12 times larger than the equity one and its annual turnover is 10 times higher than the global GDP. The London and New York markets are the largest ones and they bring 50% of the daily operations .
Considering the numbers, it’s no surprise that you want to trade Forex. But considering that there are over 170 currencies around the world, you may have no idea which pair to choose. It may help you to find out that 85% of the market transactions target 7 currency pairs (EURUSD, USDJPY, GBPUSD, AUDUSD, NZDUSD, USDCAD, USDCHF).
The most widely traded and strongest currency worldwide is the US dollar. The US Dollar dominates the Forex market because of the sheer size of the US economy, which is also the world’s largest. Most of the traders prefer the pairs that contain the US dollar, and this is why it’s considered the dominant reserve currency. The above pairs are not necessarily the best to trade but they have high liquidity.
Are the major Forex pairs the best to trade?
Forex currency pairs are organized in major and minor or crosses, and the distinction between them is based on the size of their underlying economies and the turnover they bring to the market. The world’s largest economies contribute with the major currencies of the market with the highest turnover. Smaller economies contribute with the minor currencies that are less traded.
Traders choose FX majors because they are more liquid and they can easily find information about them. Investors base their trades on information, and there’s little about minor currencies. However, seasoned traders often choose minor currencies because they can easily find an advantage or edge. Only dedicated traders trade minor currencies because it’s difficult to enter and exit trades, especially if they are held in sessions away from the investor’s home market.
The best currency pairs to trade in 2020
Based on the preferences of the traders, it’s predicted that in 2020 the followings will be the best currency pairs to trade.
USD/EUR – At present, it’s the most popular pair in the FX market, so it’s quite likely to maintain its status in 2020. It has the lowest spread among modern investors because it’s associated with basic technical analysis. Even beginners can trade this pair because isn’t too volatile.
For the people who don’t want to take risks, it’s always recommended to select a pair like the USD/EUR because it’s simple to predict its evolution. Online directories list plenty of information about this currency pair, which can help beginner traders avoid mistakes.
USD/GBP – this is another popular pair because of the possible large jumps and the profitable pips it provides. Isn’t advisable for rookies to trade this pair because it’s volatile. Seasoned traders prefer this currency pair because they can predict its evolution based on market analysis.
USD/JPY – You’ll often see this pair in the FX market because it’s quite popular among investors. Traders can follow a smooth trend of the USD/JPY in comparison with the other ones, and it’s often associated with low spreads, so it’s profitable for both beginners and professionals. It’s famous for the exciting opportunities it brings to traders.
What are the best currencies to trade nighttime?
The Forex market is open 24/5 because the trading starts in Asia, then migrates across Europe and the Middle East, and finally gets to the USA. Because of different time zones, night trading occurs differently in various locations. If you’re located in the UK, then night trading for you is when the European and USA markets are closed. At night, all major pairs are less volatile because there’s reduced liquidity.
Beginners should trade at night to better understand how live trading works and once they gain knowledge, they can switch to day trading.
The best currency pair to choose at night depends on how much volatility you are looking for. If you prefer less volatility, you should opt for EUR/USD, EUR/GBP and GBP/EUR. When trading these pairs you should work with the brokers with favorable trading conditions for EU traders because the broker needs to facilitate your operations at the time of the day you choose.
But if you are looking for increased volatility, then the following pairs may prove a better option.
AUD/NZD – This pair is popular because there’s a close connection between the countries’ economies, especially thanks to their relationship with commodities. When choosing this pair, you should also check the evolution of the US dollar because most of the commodities are priced in USD. Also, check if the Chinese economy experiences any fluctuations because both Australia and New Zealand trade with China.
AUD/JPY – It’s a common choice for night traders because it provides mixed liability to the Australian and the Japanese economies, and this leads to an exciting and volatile backdrop. Research is crucial before trading this pair because you need to understand how the two economies function. The Australian one relies on natural resources, so the Australian dollar has gained itself the name of commodity currency. On the other hand, the US dollar influences the changes in the Japanese yen, so you need to keep an eye on the US economy to predict changes in the Japanese one.
NZD/JPY – During times of economic decline, most of the investors turn to the Japanese yen because it’s safe heaven on the FX market. The New Zealand dollar on the other hand is highly uncertain. To predict changes in this pair’s evolution, you need to pay attention to macroeconomic factors, interest rates, monetary policies and worldwide news. One event that influenced the evolution of the pair was the Japanese government’s intervention in 2020, during the financial crisis, when they decided to weaken the yen to maintain the country’s exports competitive.
No matter if you choose to trade at night or day, minor or major currencies, you should ensure that you conduct analysis of the currency pair you select, to know the fundamentals of the market.
Trading Support and Resistance
This week we’ll begin with our monthly and weekly forecasts of the currency pairs worth watching. The first part of our forecast is based upon our research of the past 16 years of Forex prices, which show that the following methodologies have all produced profitable results:
- Trading the two currencies that are trending the most strongly over the past 3 months.
- Assuming that trends are usually ready to reverse after 12 months.
- Trading against very strong counter-trend movements by currency pairs made during the previous week.
- Buying currencies with high interest rates and selling currencies with low interest rates.
Let’s look at the relevant data of currency price changes and interest rates to date, which we compiled using a trade-weighted index of the major global currencies:
Monthly Forecast March 2020
For the month of March, we forecast that the best trade will be short AUD/JPY.
For the month of February, we forecasted that the best trade would be short AUD/JPY. The final performance was as follows:
Weekly Forecast 1 st March 2020
Last week, we made no weekly forecast. As there were again no large and clear counter-trend price movements, we again make no forecast this week.
The Forex market is showing much more price activity compared to last week, with 78% of the important currency pairs and crosses moving by more than 1% in value over the past week. There were also several much larger price movements. Volatility is likely to remain high over the coming week and may even increase.
Last week was dominated by relative strength in the Japanese Yen, and relative weakness in the Australian Dollar.
Previous Monthly Forecasts
You can view the results of our previous monthly forecasts here.
Key Support/Resistance Levels for Popular Pairs
We teach that trades should be entered and exited at or very close to key support and resistance levels. There are certain key support and resistance levels that should be watched on the more popular currency pairs this week, which might result in either reversals or breakouts:
Let’s see how trading two of these key pairs last week off key support and resistance levels could have worked out:
We had expected the level at 1.3016 might act as resistance, as it had acted previously as both support and resistance. Note how these “flipping” levels can work very well. The H1 chart below shows how near the end of last Tuesday’s London session, the price bounced weakly off that level, forming a double inside candlestick formation marked by the down arrow in the price chart below, which eventually broke to the downside. This trade has given an excellent maximum reward to risk ratio so far of a little more than 11 to 1.
We had expected the level at 1.3463 might act as resistance, as it had acted previously as both support and resistance. Note how these “flipping” levels can work very well. The H1 chart below shows how just at the start of last Friday’s New York session, the price bounced off that level, forming a bearish pin candlestick formation rejecting that level, which immediately broke to the downside. This trade has given a maximum reward to risk ratio so far of almost 3 to 1.
That’s all for this week. You can trade our forecasts in a real or demo Forex brokerage account to test the strategies and strengthen your self-confidence before investing real funds.
Adam Lemon began his role at DailyForex in 2020 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy
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