Hi all,
Hope you are well. I was just looking to discuss another simple point. Thus it has been said that the cable market is a more a liquidable market then the euro as it has more up and down movement, thus greater volatitlity, whilst the euro/usd market generally has more money in its market. I would like to know what peoples views are on this chain of thought.
Thank you for taking the time out to read.
I look forward to your responses.
Thanks and Regards
Gurpal
Hi, Gurpal
It is true that the EUR/USD is the most heavily-traded currency pair.
And, it is also true that the GBP/USD exhibits greater price volatility than the EUR/USD.
However, these two facts are not related to one another: there is no correlation (positive or negative) between total worldwide trading volume, and average daily price volatility.
Let’s look at these two facts, one at a time.
1. Regarding trading volume: According to the Bank for International Settlements (BIS), the EUR/USD accounts for 27% of all foreign exchange transactions worldwide. The GBP/USD accounts for 12%.
There are many reasons for the dominance of the EUR/USD in worldwide foreign exchange. The primary reasons are: the U.S. and the Euro Zone represent the two largest economies in the world; the USD is the established reserve currency of the world; and the EUR is widely held around the world as a “second” reserve currency.
2. Regarding price volatility: The most common measure of price volatility is the average true range (ATR). Below are two charts showing the Daily ATR(14) over the past 2 years for the GBP/USD and the EUR/USD. Notice that the ATR for each currency pair peaked on November 5, 2008, and then declined significantly to the present time.
We can compare the price volatility of these two pairs with a simple ratio.
On November 5, 2008, when volatility was exceptionally high, the Daily ATR(14) of the GBP/USD (550 pips) was 57% greater than the ATR(14) of the EUR/USD (350 pips).
Today, January 4, 2010, when volatility in both pairs is low, the ratio is lower: nevertheless, the Daily ATR(14) of the GBP/USD (158 pips) is still 33% greater than the ATR(14) of the EUR/USD (119 pips).
It’s difficult to find a convincing explanation for why the GBP/USD is so volatile — and why the GBP/JPY is even more volatile.
One theory suggests that high volatility attracts speculators, and increased speculation causes increased volatility. Thus, a positive feed-back loop is set up, which tends to perpetuate itself. There are probably other, equally plausible, theories.
I hope this answers your questions.
Clint
^ its a cycle. It has a low spread because it is actively traded, and because of the low spread it becomes a favorite of scalpers. So it feeds on itself.
Thank you to both clint and pipsodent, very helpful and greatly appreciated
Good said pipsodent, well also most USD currency pairs are more volatile also because what happens to the USd affects a lot more than what happens to the PLN, get it?
