5.3. Major Pairs and Time Zones.
The list of foreign currencies available for trading is long, making it very easy for the new trader to feel lost. The beginner trader can instead choose to focus solely on the most traded currency pairs called the Majors. The Majors constitute the largest chunk of the foreign exchange market and provide innumerable opportunities to potentially profit.
Foreign Exchange Major Pairs Demystified.
Foreign exchange trading is fundamentally the buying of one currency and the simultaneous selling of another currency. As such, when trading currencies we invariably see them quoted in pairs. The currency situated on the left-side of the pair is called the base currency, while the one on the right is called the quote currency. The rate at which a currency pair is trading represents how much the quote currency is worth against 1-unit of the base currency.
However, currency pairs aren’t all created equal. Some pairs are traded significantly more than others. And on top of the pyramid lay the Majors, featuring currency pairs that are the most liquid and have the lowest bid-ask spread. Major Forex pairs all contain the U.S. Dollar on one side – either the base side or the quote side.
Let us look at the 7 major Forex pairs, and try to understand the factors that influence them.
1. GBPUSD.
The British Pound Sterling to the United States Dollar, often called the “Cable,” in reference to the undersea telegraph wires that used to carry bid-ask quotes across the Atlantic Ocean, represents almost 15% of the average daily global Forex transactions. The GBPUSD is highly popular among short-term traders on account of its relatively greater volatility, although its sudden price movements can easily catch you on the wrong foot if proper risk management strategies are not employed.
The policies of the Central Banks with oversight over the two constituent currencies – in this case the U.S. Federal Reserve and the Bank of England – have a major bearing on the pair’s movement and direction. When the U.S. economy performs better than the British economy, the Dollar tends to appreciates against the Pound. Contrarily, if the U.K. economy outperforms, the Dollar generally weakens against the Pound. This relative economic performance gets frequently reflected in the trajectory of the respective domestic interest rates.
2. EURUSD.
The Euro-Dollar is the world’s most traded currency pair, accounting for a quarter of the global Forex volume. That’s not surprising considering that it pits the world’s largest economy (the United States) against the second largest (the European Union). The EURUSD is also the youngest of the major pairs, with the euro gaining real circulation only in 2002.
The biggest drivers of euro-dollar volatility are monetary policy announcements of either the U.S. Federal Reserve or the European Central Bank. If the Fed hikes interest rates, it usually makes the Dollar stronger and results in the EURUSD dropping in value. Conversely, if the ECB raises rates, while the Fed in seen to stay put, the EURUSD tends to gain in price.
An interesting characteristic of the pair is that the overlap between the European and the U.S. trading session is when the Forex market is most active. This results in potentially wider price swings and greater trading opportunities. All the top online brokers allow you to trade when you want.
3. USDJPY.
The first thing that most beginner traders will note about USDJPY is that the value of a single pip is considerably larger than those of other major currencies. This is on account of the relatively low value of the Japanese Yen against the U.S. Dollar.
The USDJPY has a distinctive role in the Forex market because the Yen is often regarded as a “safe haven” investment. This means that in times of geopolitical or economic uncertainty, investors shift from trading riskier assets such as stocks and indices to trading the Yen. However, the safe-haven inflow of funds has led to steady appreciation in the Yen’s value, which is a major concern area for policymakers in the export-driven country.
The Yen is widely employed as one half of a carry trade, whereby a trader borrows money from a country with low interest rates and invests in a country that has higher rates. Since the Bank of Japan has had to combat economic stagnation and low inflation for many years, it has imposed near-zero interest rates at many points in the recent past.
4. AUDUSD.
According to the International Bank of Settlements, the Australian Dollar is ranked the fifth most frequently traded currency in the world. Australia is a major gold producer and exporter, resulting in high correlation between bullion prices and AUDUSD. The pair has become a favoured trading vehicle of speculators over the past few years. A multi-decade boom in commodity prices, coupled with the interest rate differential in the currency pair, allowed traders to not only benefit from the strong Bull Run in the Aussie, but also earn rollover income from being long the pair. However, over the course of the last few months, the positive sentiment seems to be waning as economic difficulties in biggest trading partner China, and a significant drop in metal prices, have created uncertainty over Australia’s growth outlook.
5.USDCAD.
Once again, commodity prices tend to have a disproportionate impact on the direction and movement in the “Loonie,” as the pair is referred to in trading circles, thanks to the presence of large reserves of crude oil and natural gas in Canada. Due to the close economic ties between the United States and Canada, the performance of the Canadian dollar is intimately linked to that of the U.S. economy. As a result, in minor currency pairs like the EURCAD, the Canadian dollar generally performs similarly to its U.S. counterpart. But when paired with the U.S. Dollar, price movements can become harder to forecast.
6. NZDUSD.
Since New Zealand is among the top-five global exporters of dairy products, the volatility in NZDUSD tends to spike whenever there is some release of data related to New Zealand’s dairy industry. Other than that, like all other currency pairs, the respective central banks and their policy announcements are a key driver of the pair’s movement. More so when the Reserve Bank of New Zealand spells out its monetary policy stance that doesn’t line up with what the U.S. Federal Reserve is doing.
7. USDCHF.
The presence of Swiss Franc among the major Forex pairs may seem a bit odd at first glance. After all, Switzerland isn’t a big economy – unlike the euro zone, the U.K. and Japan. The Swiss Franc owes much of its popularity to its status as a safe haven asset. Switzerland’s long history of political neutrality and economic stability ensures that its currency perfectly fits the bill of a safe haven investment. Consequently, whenever there arises some geopolitical strife or economic uncertainty, traders lower their exposure of riskier assets and seek the safety of the Swiss Franc. At other times, the Swiss Franc usually mimics the broad movements in the euro. This is due to the close economic relationship that Switzerland shares with the euro zone.