What are the major currency pairs and why are they so popular?
Not all currency pairs are equally popular, some are traded more than others. Investors and the media sometimes have different ideas about which pairs are considered major. However, most agree that the following four currency pairs belong to the group of major pairs:
Typically, lists of major currency pairs also include the three most important "commodity currencies" against the US dollar: AUD/USD, USD/CAD, and NZD/USD. Together, these three currency pairs make up approximately 80% of the world's Forex trading.
In addition, other major pairs do not include the dollar, such as EUR/GBP, EUR/CHF and EUR/JPY. These pairs are called "cross" pairs. The four most popular currency pairs. Trading on EUR/USD.
The two main drivers of Eurodollar volatility are the Federal Reserve and the European Central Bank (ECB), and especially the interest rates set by these two institutions. For example, if the Fed raises its interest rates, this will strengthen the US dollar and cause the EUR/USD to fall.
The popularity of the EUR/USD pair provides constant liquidity, making spreads competitive and offers to buy or sell plentiful.
Trading on USD/JPY
The first thing that stands out in the USD/JPY pair is the value of the corresponding pip, which is much higher than other currencies. This is due to the relatively low value of the yen against the dollar.
The yen is often used in a "carry trade" where an investor borrows money in a country where interest rates are low and then invests in a country where they are high. The Bank of Japan has struggled with low inflation for many years and has repeatedly imposed negative or near-zero interest rates as a result.
It also allowed the yen to gain safe haven status, which led to USD/JPY rising during times of economic uncertainty. However, many investors see the dollar as a safe haven, which could complicate the movement of the pair.
Trading on GBP/USD
The cable takes its name from the submarine cables that were once used to transmit buy and sell quotes across the Atlantic Ocean and is a nod to the couple's glorious past. Before the dollar gained prominence, the pound sterling served as the world's reserve currency. The GBP/USD and EUR/USD pairs have a lot in common. First of all, although the United Kingdom has never been a member of the euro area, its economic power is closely linked to the European Union. Second, unlike USD/CHF and USD/JPY, the dollar serves as the quote currency for both the cable and the Eurodollar. This means that these two pairs often rise when the dollar is weak and fall when it is strong.
As with every currency pair, the policies of the central banks on which the two currencies that make up the GBP/USD depend - the Bank of England and the Federal Reserve - will have a big impact on its price.
Trading on USD/CHF
The presence of the Swiss franc among the four major currencies at first glance may seem surprising. It is true that Switzerland is not a major global economy, unlike the euro area, Japan and the UK.
Like the yen, the popularity of the Swiss franc is based on its safe-haven status. This makes it a fairly popular currency during times of economic uncertainty or market turmoil, when investors especially like markets that are perceived as low risk. This is the case of Switzerland, which has long been known for its stability, security and neutrality.
When there is little volatility in the market, the Swiss franc will follow the market movements of the euro due to Switzerland's close economic relationship with the eurozone. "Commodity currencies"
Trading on the AUD/USD pair
The Australian dollar and the Canadian dollar are often referred to as "commodity currencies", reflecting the important role of natural resources in the respective economies they represent. For AUD/USD, this is mainly livestock, wool farming and wheat farming.
Thus, commodity prices strongly influence the movement of the AUD/USD, as do interest rate decisions made by the Central Bank of Australia (RBA). Indeed, the latter tends to favor higher rates than other major central banks.
Trading on USD/CAD
Commodity prices have a big impact on USD/CAD prices as lumber, natural gas and oil are central to the economy of the world's second largest country.
However, the USD/CAD pair is characterized by a certain pattern in which the behavior of the Canadian dollar is closely linked to the US economy. As a result, in minor pairs such as the EUR/CAD, the Canadian dollar can behave similarly to its US counterpart. In addition, against the US dollar, price movements can be more difficult to predict.
Trading on NZD/USD
The final "commodity currency" pair is the New Zealand dollar against the US dollar, also known as the "kiwi". Agriculture, along with international trade and tourism, are key elements of New Zealand's economy. This is why the price movement of agricultural commodities often affects the price of NZD/USD.
As with all currency pairs, the role of central banks should not be underestimated. In this case, New Zealand's central bank sets interest rates, which can have a major impact on the NZD/USD exchange rate, especially when they differ significantly from the rates set by the Fed.
Other currency pairs (crosses)
Trading on EUR/GBP
A fundamental currency pair that evaluates the relationship between the UK and the Eurozone. The EUR/GBP pair became especially interesting after the Brexit vote on June 23, 2016.
Trading on the EUR/JPY pair
As the second most important currency in the world, the euro can replace the US dollar in the pair. For example, in the EUR/JPY pair, the problem associated with the perception of the yen and the dollar as a safe haven is removed.
Trading on EUR/CHF
As for EUR/GBP and CAD/USD, EUR/CHF combines two economies that are very close to each other. For four years after 2011, the value of the Swiss franc was indexed against the euro by decision of the Swiss National Bank.