By Jameel Ahmad, Vice President of Corporate Development, FXTM
The United States is the world’s largest economy, and its currency – the US dollar – is the most sought-after and popular base currency in the big four major pairs, which are comprised of the EURUSD, the GBPUSD, the USDJPY, and the USDCHF. The major currency pairs tend to take the lion’s share of headlines, and most trading is carried out on these asset pairs, which are also seen as being more transparent when it comes to technical analysis, simply because there is so much more data to be found on the majors.
Unless there is unforeseen volatility or a crisis in the currency markets, however, the major pairs tend to have a stable exchange rate, and vary only slightly against each other on a day-to-day basis. It is actually this relative stability that makes the majors an attractive investment and benchmark for the health of the world’s largest mature economies. Major currency pairs move up and down in value in accordance with the latest economic data coming out of the United States, the UK, Japan, the European Union and Switzerland, and on any given day of the week, there’s likely to be an economic news release that will affect these currency pairs.
There are other currency pairs called the minors, which are different in that they do not contain the USD. Instead, they are foreign exchange crosses made up of large, mature economies’ currencies like the CHF from Switzerland and the Euro from the European Union. An example of a minor currency pair would be the EURCHF, or the EURGBP, also known as Euro crosses, or GBP crosses.Falling somewhere outside the big four majors category and the minors category are the AUDUSD, the NZDUSD and the USDCAD, which – while being liquid and extremely popular – are not traded on the level of the big four majors.
Trading the minors is a different proposition to the majors, and it can be said that the traders who are experienced enough to manage their risk are attracted to these currency crosses because they tend to have less predictable price stability, and therefore the potential for gain is higher. The dominating influence of the USD is taken out of the immediate trading scenario, but one should always be aware that on some level, even the minor currency pairs are reacting indirectly to the USD’s price.
A good example of how unpredictable and volatile a minor currency pair can be is the EURCHF, which had a now-world-famous crisis in January 2015 when the Swiss National Bank (SNB) un-pegged the CHF exchange rate from the 1.20 francs per euro that had been in place for three years – a long enough time for investors to forget that this peg was a choice that could be reversed anytime it was no longer in the SNB’s interest. The resulting volatility was legendary in the forex markets; in one day, the CHF rose by 30 percent against the EUR, before reversing and finding its un-pegged rate at parity.
Central Bank decisions, along with macro-economic new announcements are very influential in trading decisions about minor currency pairs. Included in these types of announcements are Gross Domestic Product, Unemployment, Service and Manufacturing sector performance benchmarks and the Consumer Price Index. Dramatic changes in these macro-economic and banking scenarios are often drivers of sharp price changes between the minor currency pairs, so keeping a close eye on these types of developments is a wise idea for aspiring and experienced investors.
No article about the majors and minors would be complete without a word about exotic currency pairs. By far less liquid and stable than the majors and minors, exotic pairs are made up of one major currency matched with the currency from an emerging economy; for example: the dollar rand, or USDZAR, representing the USA and South Africa. It is more difficult to trade exotics because of the different macroeconomic circumstances in some emerging markets, which means that they often miss out on reporting the various benchmarks that are used to evaluate the majors and minors. It may also be more expensive to trade these pairs, given that they are more costly to access by financial institutions, so it is important to evaluate the cost-benefit of these trades.
In conclusion, the major currency pairs are highly liquid, show relative price stability and are favoured by traders; the minor currency pairs are less liquid, but may provide more opportunities to experienced traders because of sudden fluctuations; and the exotic currency pairs are the least liquid to trade, even though they may be highly valued.
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