Different FX currency pairs offer certain advantages and disadvantages to the FX trader. For instance, some currencies may be susceptible to low liquidity during specific parts of the trading day, whilst others are more easily moved by political events.
Essentially the currencies of the FX market can be divided into three broad categories:
Table of contents
FX Major Pairs
The major pairs make up the biggest share of the FX market at about 85% of all trades. These are the largest traded currencies and are quoted against the dollar. By volume, the EUR/USD, GBP/USD, USD/JPY and USD/CHF are the most traded pairs, constituting around 85% of the FX market. Because of the large trading volume, the currency majors have a high liquidity. Consequently, the major pairs usually have the tightest spreads. This makes them ideal for day traders aiming to make gains from small, frequent fluctuations in the market. However, it should be noted that these markets do experience periods of lower liquidity. For example, outside of trading hours in the major financial centers such as New York or London the major pairs are traded in less volume and the markets become more volatile.
FX Cross Pairs
Besides the majors that include the USD, there are the cross pairs. The most popular are generally the EUR, JPY, and GBP. Typically, the cross pairs will have lower liquidity than the majors. However, some pairs can have higher liquidity because of large institutional investors, e.g. occasionally EUR/CHF can have higher liquidity than USD/CHF. These are the most popular crosses:
- EUR/JPY: This is closely linked to the EUR/USD and many traders attempt to take advantage of the difference in growth and interest rates in the Eurozone and Japan.
- EUR/GBP: The Eurozone is the United Kingdom’s largest trading partner. This pairing is renowned for usually having low volatility.
- EUR/CHF: From 2011-2014, the Swiss Franc was pegged to the Euro after months of large price movements. In December 2014, the SNB removed the cap leading to large losses for many traders.
- NZD/JPY: As the currency pair generally with the largest interest rate differential, the NZD/JPY is popular with carrying traders.
- CAD/JPY: Canada’s position as an oil exporter and Japan’s as a major importer give this pairing a close relationship with oil price movements.
Exotic FX Pairs
These are the lesser traded currency pairs, typically from developing economies. Notable examples would be the South African Rand (ZAR), Turkish Lira (TRY) or the Brazilian Real (BRL). The exotic FX pairs, as implied by the name, are associated with high levels of unpredictability. Generally, these pairs are more susceptible to political and economic developments. However, the lower volume of trading tends to slow the pace of trade. Consequently, the price action tends to be more predictable than with the major FX pairs. Low liquidity also means that exotic pairs usually have wider spreads.
- Forex For Beginners
- A Three Dimensional Approach To Forex Trading
- Understanding Price Action: practical analysis of the 5-minute time frame
- Quantitative Trading with R: Understanding Mathematical and Computational Tools from a Quant’s Perspective
- The Death of Money: The Coming Collapse of the International Monetary System
- Economics of Monetary Union