One main difference between an FX trader and a trader of physical goods is that the former usually requires at least some FX volatility to profit while the latter usually prefers to minimize FX volatility. ย It naturally follows then that many of the pro-trade policies of many Asian countries aim to minimize movements in their currencies with respect to their trading partners.
Hong Kong, many Middle Eastern countries and China (between 1997-2005 and briefly 2008-2010) are among those whose simple answer to this problem is “the US is our largest trading partner, so let’s simply peg our currencies to its dollar.” ย The problem with this approach of course is that the dollar itself is very volatile, so while trade with the US and other dollar partners may be made smoother, there is perhaps as much volatility against EUR, JPY and other major currencies as there would be with a floating currency.
Singapore on the other hand manages its currency to a basket that more intelligently tries to minimize overall FX volatility against the rest of the world’s currencies.
So it should not be surprising that of the 10 currencies below, China’s Renminbi (CNY) has the least volatility against the USD, or that the Singapore dollar (SGD) is the least volatile against both USD’s main competitor (EUR) and an equally-weighted basket of the three majors. ย What did surprise me was:
- In this sample, China’s RMB was also the least volatile pair against the Japanese Yen (JPY)
- The ASEAN currencies, and sometimes the New Taiwan Dollar (TWD) are not far behind SGD in being less volatile against the EUR and the basket.
- The Korean Won (KRW) has been far more volatile than even the Indian Rupee (INR) and Indonesian Rupiah (IDR) over the past 5 years.
| 13-week FX pair volatility | EUR | JPY | USD | Equal-weight Basket | ||||
| Max | Average | Max | Average | Max | Average | Max | Average | |
| CNY | 20.7% | 8.0% | 17.3% | 7.5% | 2.1% | 1.0% | 11.4% | 4.4% |
| IDR | 28.9% | 8.7% | 31.9% | 10.0% | 30.9% | 5.8% | 28.9% | 6.4% |
| INR | 17.9% | 8.7% | 42.0% | 11.2% | 26.2% | 7.5% | 20.4% | 7.0% |
| KRW | 41.6% | 9.6% | 78.8% | 13.3% | 59.5% | 10.3% | 49.2% | 9.0% |
| MYR | 13.6% | 7.0% | 24.6% | 9.8% | 9.5% | 5.4% | 8.5% | 4.8% |
| PHP | 14.1% | 7.4% | 23.0% | 9.1% | 10.0% | 4.7% | 8.0% | 4.9% |
| SGD | 12.8% | 6.0% | 26.2% | 8.3% | 10.2% | 4.4% | 7.2% | 3.4% |
| THB | 17.8% | 7.4% | 26.7% | 8.1% | 9.1% | 3.5% | 8.7% | 4.4% |
| TWD | 15.8% | 7.2% | 23.9% | 8.1% | 7.2% | 3.8% | 8.6% | 4.2% |
| VND | 20.6% | 8.9% | 19.4% | 8.3% | 11.2% | 3.3% | 11.3% | 5.7% |
The above data are taken from OANDA weekly over the past 5 years.
