The FX market has been regarded as a sleeping giant for close to a decade, mainly because low-interest rates suppressed volatility in the currency space. However, with central banks normalizing monetary policy in 2022 by hiking rates and selling assets, things have taken an impressive turn.
Currency pairs are now seen as more volatile, given exchange rates must adjust to the changing economic picture. In such an environment, traders need to consider all their options and trading minor FX pairs is one worth analyzing.
Currency volatility
Despite accounting for several trillion USD in daily volumes, when FX volatility spikes, managing risk is increasingly difficult. This year has been one to remember for the US Dollar, which rose against most other major peers.
Right now, the upward move in the Dollar looks rather extended, according to analysts working at CAPEX.com, so traders should focus on pairs that don’t contain this currency, a.k.a. minor FX pairs. CADJPY, GBPAUD, and EURCHF are just some examples, all of them covered by CAPEX.com and the majority of brokerages out there.
Currencies losing value or appreciating too much is not something that governments can tolerate for too long, especially now when the risks of a global recession are elevated. G7 country members met in Germany in October 2022 and reaffirmed a warning against excess volatility in the currency space.
As long as there are other options on the table, this may be regarded as a proper period to trade minor FX pairs. Ironically, it’s a solution for traders with lower risk tolerance, considering minors have not been as volatile as USDJPY or GBPUSD, for example.
Diversification
Managing risk while trading forex can be done in two main ways. On one hand, traders can use stop losses on every trade and risk only a small percentage of their accounts. That way, even if the market does not behave as expected, the loss is contained and there is enough purchasing power left in the account to go after the next trade opportunity.
Diversification is another solution for navigating this volatile period, on the other hand. As part of their daily market analysis, traders should not ignore minor pairs, because the price does react to support/resistance levels as well, as large trends can unfold.
Monetary policy divergence
Synchronized monetary policy tightening was noticed this year, but now there are already signs that some central banks might reach the peak of the normalization cycle. CAPEX.com believes this might once again create imbalances in the currency space, considering not all countries share the same problems.
The Bank of Canada and Reserve Bank of Australia delivered smaller rate hikes at their latest meetings, reinforcing the fact that central banks are worried about overtightening. Inflation remains elevated and it will take time not just to ease, but also until the rate hikes are felt in the economy.
Developments with regard to monetary policy are another reason to consider minor FX pairs since traders can find a lot of options there, where such changes lead to established currency trends.