3. Pair in Forex
The definition of ‘major currency pairs will differ among traders, but most will include the four most popular pairs to trade - EUR/USD, USD/JPY, GBP/USD and USD/CHF. ‘Commodity currencies’ and ‘cross pairs’ are also categorized as majors. Below we explore the major currency pair categories.
The base currency is the first currency stated in a currency pair quote. For example, in USD/EUR, the U.S. dollar is the base currency. The second currency is the quote currency, which states how much of the quote currency is required to buy one unit of the base currency.
Major currency pairs
The most traded currency pairs are listed below. They represent some of the world’s largest economies and are traded in high volumes. Higher volumes tend to lead to smaller spreads.
EUR/USD – Euro Dollar
USD/JPY – Dollar Yen
GBP/USD – Pound Dollar
USD/CHF – Dollar Swiss Franc
The EUR/USD (Euro/US Dollar) nicknamed ‘Fiber’ is the world’s most traded currency pair commanding 23% of FX transactions in 2016. The Euro and the US Dollar represent the two largest economies in the world, the US Economy and the European Union. The popularity of the EUR/USD ensures that it trades at tight spreads. High volumes lead to reduced price differences between the bid and offer.
The USD/JPY (US Dollar/Japanese Yen) is also known as ‘The Ninja’ and is the second most traded currency pair. The Yen is often used by carry traders who borrow the Yen and invest it into higher yielding currencies. The Bank of Japan has had to combat low inflation and growth for many years, and as a result it has a very low interest rate. The USD/JPY is also traded in extremely high volumes which leads to low bid-ask spreads and lots of liquidity. The Yen is also known as a safe-haven currency amongst traders.
The GBP/USD (Pound Sterling/US Dollar) is nicknamed ‘Cable’ due to the undersea cables that used to carry bid and ask quotes across the Atlantic Ocean. This major forex pair shares similarities with the EUR/USD. Both are highly correlated because the United Kingdom’s economy is tied to the European Union. Traders enjoy tight bid-ask spreads on the GBP/USD due to its high liquidity.
The USD/CHF (US Dollar/Swiss Franc), nicknamed ‘Swissy’, derives its popularity from the Swiss Franc’s safe-haven status. When risk/volatility enters the market, traders bid up the Swiss Franc because the Swiss economy is seen to have lower risk.
Commodity currencies like the Aussie, Loonie and Kiwi are forex pairs that are greatly influenced by commodity prices.
The AUD/USD (Australian Dollar/US Dollar), or ‘Aussie’, is greatly affected by mining commodities, farming of beef, wool and wheat. The Aussie also tends to do well when China does well because the two countries are big trading partners. The Reserve Bank of Australia (RBA) also has major influence over the AUD/USD.
The USD/CAD (US Dollar/Canadian Dollar) or ‘Loonie’ is also heavily affected by oil, timber and natural gas. Interestingly, the Canadian dollar is closely tied to the US economy.
The NZD/USD (New Zealand Dollar/US Dollar), also known as the ‘Kiwi’, is heavily influenced by data releases of agriculture and tourism.
Cross currency pairs do not include the US Dollar. Historically, currencies had to be exchanged into US dollars before they could be exchanged into other currencies. The popular cross pairs are the EUR/GBP, EUR/JPY and the EUR/CHF.
This cross pair explores the relationship between the UK economy and the European Union. Forecasting the EUR/GBP can be difficult because the economies are interlinked.
Some traders believe EUR/JPY is easier to forecast larger trends than USD/JPY because the US dollar and the Japanese Yen are both seen as safe-haven currencies. This makes the EUR/JPY a popular cross currency pair.
Like the EUR/JPY, the EUR/CHF gains its popularity from the fact that the Franc is a safe-haven currency. The EUR/CHF is also therefore seen as a popular currency cross pair during times of market volatility.