The volatility measures the risk. The risk is it a result of distribution of prices measured by the standard deviation. The standard deviation is an average deviation from the mean and that is what we call volatility. Volatility tends to give further emphasis to large differences. It actually indicates a level of risk but the measure of the risk is not totally efficient.

Indeed, we do not know the profile of the average deviations. The differences can be regular or very irregular. For example if we say that the EUR / USD ranges in averaged by 300 pips per day, it can conceal the fact that during some days the parity varies from 600 pips and the other from 0 pip. Volatility have to be taken with distance.

Another criticism that can be done, the volatility does not provide information on the distribution tails. These are events that have very little influence on average because they are very rare. The EUR / USD has a volatility of 1000 pips on the day is such a rare event. Because of the number of distribution take into consideration in the calculation of the volatility, the move of 1000 pips, which is an exceptional event, will have a very little influence. However, the risk is there.

Now that you are warned of the risks to the use of volatility, I can show you why what you’re here, which is the most volatile parity. The following study was conducted throughout 2008 and shows the volatility of different currency pairs in number of pips on a day of trading:

Be careful to not forget that a move of 100 pips on the NZD / USD did not even equal to a move of 100 pips on EUR / USD. I am talking about the variation of the dollar. NZD / USD is priced at 0.6425 and the EUR / USD at 1.4065, so a profit of 100 pips on the NZD / USD has more importance in terms of dollar value than 100 pips on EUR / USD.

Here is another study that complements the first. The study was conducted throughout the year 2008 as well. It shows the average daily change in percentage on major currency pairs:

We note that the parity including the Yen are those with the largest variations. Concerning those which moving the less, it is mainly about parity with the British pound. This was a big surprise to found the GBP / USD at the bottom of the list because this parity is one of the most volatile. Finally, we note also that day with the biggest changes are Tuesday and Thursday. But, no surprise, these are the days when most important economic news are disclosed. For the rest, I let you draw your own conclusions.

I know that everyone like this I give you one more study. Here is a study of average yearly changes from 1998 to 2008 on the EUR / USD:

This study was conducted to reveal an essential point: the importance of the fundamental. Indeed, we note that the years with the biggest changes are those in times of economic crisis. 2000 with the crisis of the Internet and in 2008 with the subprime crisis are all factors which make it much more volatile foreign exchange market. During these periods, investors are in the dark and respond to any economic information given to them. It is always the case, investors have a lot of questions about the state of different economies that makes the market more volatile. One might conclude with this: The uncertainty to the use of volatility.