The foreign exchange market, commonly referred to as the forex market, is based on the trading of one currency for another. The exact amount of one currency that is exchanged for an amount of a second currency is determined by the value of each.
The quotation of two different currencies being traded, by which the value of one is compared to the value of the other, is called a ‘currency pair’.
The forex major currency pairs are a series of currencies that are commonly traded. Due to the fact that these pairs are popularly and often traded, the price bands tend to be narrower but--like all currencies--they’re still subject to the volatility of the market.
While the complete list of major currency pairs might differ from trader to trader, there are four major pairs that are not up for much debate. It is important to note that the first currency is the base currency, while the second is the quote currency.
These four major currency pairs include:
Outside of the four main currency pairs, many consider these three to be additional major trades. At times, any of these pairs might actually be greater in volume traded than the four majors above. They are referred to as commodity pairs because of the fact that the economies of each are majorly dependent on a specific commodity.
In this currency pair, the US dollar is traded for the Canadian dollar. The commonly used nickname for this pair is ‘Loonie’.
In this currency pair, the Australian dollar is traded for the US dollar. The commonly used nickname for this pair is ‘Aussie’.
In this currency pair, the New Zealand dollar is traded for the US dollar, or vice versa. The commonly used nickname for this pair is ‘Kiwi’.
In case you hadn’t noticed, all of the above currency pairs include the US dollar, the world’s reserve currency.
That’s not to say though that other currencies can’t be traded without going ‘through’ the US dollar. Of these, the major cross currencies (determined by trade volume) include:
GBP/EUR - also known as the Chunnel.
EUR/CHF - also known as the Euro-swisse.
EUR/JPY - also known as the Yuppie.
EUR/USD, measured by trade volume, is the largest of the currency pairs. The larger the volume the higher the liquidity as more traders are buying and selling these currencies. Both the relatively lower volatility and the popularity of its trade are reflective of the fact that the European Union and the United States represent the two largest economies in the world. Of course, the EUR/USD is not immune to volatility though and still subject to price shocks.
CBP/USD, while still very liquid and commonly traded, is less so than the one above. Liquidity in the foreign exchange market peaks during times when both markets in New York and London are open. Interestingly, the nickname cable refers to the deep-sea cables that used to be required for sending information from Britain to America. (By the same token, Fiber is thought to be the nickname of EUR/USD in reference to the upgraded fibre cable system. Albeit spelled the American way: Fiber.)
USD/JPY is an interesting currency pair because the yen is of much lower value to the dollar. What does this mean for traders? It means that of all the major currency pairs and currencies, a pip in the Yen’s price is likely to be significantly larger than that of others. The Bank of Japan uses a number of measures, including quantitative easing and interest rates, to slow inflation and growth, which has led it to being considered a safe place to store funds during times of increased uncertainty. Additionally, the yen is the world’s fourth most important reserve currency. (USD being the first.)
USD/CHF earns its place on the list of major currency pairs in much the same way as the USD/JPY does. Considered a safe haven due to Switzerland’s financial stability and low market volatility, many use the CHF in much the same way as the JPY. The franc’s volatility is largely determined by the fluctuation of the euro, but in comparison to others it remains a reliable and stable currency and economy.
The USD/CAD pair is impacted heavily by the price of Canada’s main export: oil. As oil’s supply fluctuates, along with its price, so does the Canadian dollar relative to the US dollar.
AUD/USD is strongly affected by the value of commodities upon which the Australian economy largely depends, mainly coal, iron ore and a variety of metals like copper. As the prices of these commodities shift, so will the Aussie dollar relative to that of the US.
While the smallest country whose currency features on the major currency pairs list, New Zealand’s large agriculture export is the main contributing factor to NZD/USD landing on this list. The active monetary policies of the Reserve Bank of New Zealand can make for rather impactful changes to the price of the NZ dollar compared to the US’s. The term Kiwi is in reference to the small, flightless, native bird in New Zealand, called the Kiwi bird.
The major cross currency pairs reflect the most liquid of trades that don’t include the US dollar in the forex market. Despite that, with even just a cursory glance at the currency pairs--GBP/EUR, EUR/CHF and EUR/JPY--you’ll notice that all still include the currencies from the major list. Between the size of the economies backing the British pound or EU’s euro and the stability of the franc and the yen, it’s understandable why these cross currencies are so heavily traded.
Chunnel, as a nickname, is taken from the Channel Tunnel which connects England to France i.e. Great Britain to the European Union. Yuppie is derived from the first two and last two letters in EUR/JPY.
Whether you want to start trading any of the above most traded currency pairs, would like to find out more about how forex trading works, or simply want to know why more and more traders are choosing Global Prime for their trading partner, get in touch with our team today.
