London is the largest and most important dealing center in the world, with a market share of more than 30 percent, according to the 2004 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity published by the Bank for International Settlements (BIS).
Most of the forex dealing desks of large banks are located in London, and the majority of major forex transactions are completed during London hours because of the market’s high liquidity and efficiency.
The vast number of market participants and their high transaction values make London the most volatile forex market of all. The ranges for half of the 12 major currency pairs surpass the 80-pip line, the benchmark that was used to identify volatile pairs. The British pound/Japanese yen (GBP/JPY) and British pound/Swiss franc (GBP/CHF) pairs had the largest average ranges — 140 and 146 pips, respectively.
The GBP/JPY and GBP/CHF pairs are well suited for risk-seeking traders.
Their high volatility reflects the peak of daily trade activity, as large market participants are in the process of completing the global currency conversion cycle. London hours are directly connected to both the earlier Asian session and the later U.S. session: As soon as large banks and institutional investors are finished repositioning their portfolios, they need to start converting the European assets into dollar-denominated ones again in anticipation of the opening of the U.S. market. The combination of these two reconversions by the big players is the major reason for the extremely high volatility during this period.
More risk-tolerant traders have plenty of other pairs to choose from. The Euro/U.S. dollar (EUR/USD), U.S. dollar/ Canadian dollar (USD/CAD), British pound/U.S. dollar (GBP/USD), and U.S. dollar/Swiss franc (USD/CHF) rates, with average ranges of around 100 pips, are ideal picks because their high volatilities offer abundant opportunities to enter the market. As mentioned earlier, trading between the European currencies and the dollar picks up again because the large participants have to reshuffle their portfolios for the opening of the U.S. session.
For more risk-wary traders, the New Zealand dollar/U.S. dollar (NZD/USD), Australian dollar/ U.S. dollar (AUD/USD), Euro/Swiss franc (EUR/CHF), and Australian dollar/Japanese yen (AUD/JPY), with average ranges of approximately 50 pips, are good choices. These pairs provide traders with high interest incomes in addition to potential trade profits. They allow investors to determine their direction based on fundamental economic factors and are less prone to losses because of intraday speculative trades.
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