Are you trying to understand why the foreign exchange market is constantly fluctuating? During these trying times, its important to understand what makes the graphs tick and why global currencies are up one day and down the next.
What is volatility?
The term volatility pertains to the drastic changes in the market. However, it’s the market’s liquidity that has an integral impact on the volatility of the market.
Liquidity in the foreign exchange market surrounds how many active traders exist worldwide. How many trades do they make? What is the total volume of trades they are making? The foreign exchange market is one of the most liquid markets in the world due to the consistent activity on a daily basis. Traders are able to activate trades 24 hours a day during the week.
It is known that a market with low liquidity has higher volatility. And vice versa can be said for markets with high liquidity, meaning that the market experiences low levels of volatility. Therefore, one would expect that the forex market being extremely liquid would experience minor changes in price and low levels of market volatility.
However, evidence from recent experiences – this is not necessarily true.
Drastic Changes in FX Market – USD/ZAR pairing
Currencies around the world are impacted by economic, environmental, medical and political events. Some currency pairs are more volatile than others. One of the most volatile currency pairs is the USD/ZAR (the United States Dollar/South African Rand). This currency pairing is greatly impacted by the price and value of gold.
One of the main exports of South Africa is gold, and gold is priced in USD worldwide. What does this mean on a practical level? This means that gold strongly correlates with the strength of the USD.
When the value of gold increases, the value of the dollar will most likely also inflate against the Rand. This result is positive for merchants that sell gold, allowing them to obtain a greater amount of USD for what they sell.
However, it will also cause USD to become more expensive when buying with Rand. Individuals looking to trade with the USD/ZAR currency pairing should investigate the intricacies surrounding gold and its value prior activating a trade.
Factors to Consider
Traders looking to trade foreign exchange should begin their research by ascertaining nations engaged in tense environments. One of these examples is the trade war between America and China.
Furthermore, they should understand the various import and export relationships a particular country holds, i.e. Australia’s dollar is known as a commodity currency – specifically to do with minerals and metals.
The currency pairing of GBP/EUR has seen constant volatility in recent times due to the implications of Brexit. Traders interested in trading with this pair should keep up to date with key policy announcements or with votes held in the British House of Commons.
Finally, emerging markets also cause a high level of volatility in the foreign exchange industry. A prime example being Brazil, and traders interest to capitalise on economic developments in South America.
In a world that is uncertain, one thing can certainly be expected: volatility in currency markets. If you’re planning on trading amidst this uncertainty, tread carefully. Trading forex is inherently risky but especially during volatile markets. Find a broker you can trust at Compare Forex Brokers.
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