Meet The Minor Currency Pairs
Being a successful trader on the foreign exchange market involves plenty of reading and researching. Since currency pairs are the foundation of the forex market, one has to know as much as possible about both major and minor currency pairs.
Surely, the major currency pairs are more prominent, but you shouldn’t underestimate the minor pairs either. In order to truly understand the way the market works, a trader should be thorough and have the knowledge about the both sides of the currency pairs. Trading the minor pairs can be more challenging than playing it somewhat safe and holding onto the major currency pairs and that is one of the reasons why some of the traders choose to ignore the major ones and trade the minor currency pairs only.
To begin with, you need to know the definition of a currency pair – it is the value of a certain currency in comparison to another currency. The first currency is called the base currency while the second one is the quote currency. The currency pairing represents the amount of the quote currency you need in order to buy one unit of the base currency.
The major currency pairs
There are four major currency pairs in the foreign exchange market and those are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
The EUR/USD currency pair is by far the most popular one. The reason for the high demand is understandable – both the United States and the European Union are the largest economic forces in the world right now. The US dollar is the most sought after currency in the market and euro holds the second place. When you combine those two into one currency pair, it is obvious that it will be the most used currency pairing in the foreign exchange market.
When it comes to the USD/JPY pairing, you have to remember that the economy of Japan is the strongest economy in Asia. Japan is known for exporting various products all around the globe and therefore, if a retailer from Europe wants to buy a product made in Japan, they have to exchange their domestic currencies into Japanese yen and then make a purchase. Low-interest rates make yen very attractive to the foreign exchange market traders and it is widely regarded as the best currency for the carry trade.
Even though the economy of the United Kingdom is not as prosperous as the economy of the European Union, it doesn’t make the British pound any less desirable. GBP/USD currency pair is one of the oldest pairs around and it is still in demand. However, the price of the British pound is prone to sudden changes, so a trader has to be very careful if they choose to trade this currency pair. It is influenced by various factors and one has to be really invested in following the current news from the Great Britain in order to predict the future movement of the British pound.
Switzerland has a reputation of a very stable country and it is an ideal place for private banking. They have a high standard of living and the Swiss franc has a status of a strong currency. Even though they are not a part of the European Union, they have a good relationship with the surrounding countries as well as with the rest of the Europe. Therefore, USD/CHF pairing is seen as one of the best in the foreign exchange market.
Trading the minor currency pairs
Surely, the most of the trading in the foreign exchange market is done by using the major pairs but the minor pairs are important as well. First of all, there are three more currency pairs that include the US dollar, as well as the currencies from the Scandinavian countries which are not using the euro as their domestic currency. There are also a couple of so-called cross currency pairs which do not include the US dollar as either the base or quoted currency.
So let’s take a look at the minor currency pairs that involve the US dollar. The first of the three is the USD/CAD pairing. What you need to know about the Canadian dollar is that the price movement is heavily influenced by the economy of the country, and that the Canadian economy is linked to the economy of the United States due to the fact that those two countries are neighbors – they are each other’s largest trading partners. Also, this pairing is the most liquid of the three. The trades are completed unusually quickly because the currency trading centers, Toronto and New York, are located in the same time zone. If a trader chooses to buy or sell within this currency pair, they have to follow the official statements and reports from the Bank of Canada, as well as the general news because the price of the Canadian dollar does react to those, just like every other currency out there.
The second and the third pairings are AUD/USD and NZD/USD. The growth of the entire economy of Asia made an impact on Australia as well as on New Zealand. The price of the Australian dollar is linked to the economic reports from New Zealand and they can influence each other. But since Australian dollar is stronger than the New Zealand dollar, it is usually the other way around. However, if you decide to go for AUD/USD currency pair, you have to be aware of the financial reports coming from New Zealand as well because the economies of these two countries are connected to each other.
Australian Dollar Meet The Minor Currency Pairs
When it comes to the economy of New Zealand, they did a complete overhaul in the past decade or so, switching from exporting agricultural products to one of the largest manufacturers of various goods in that part of the world. You have to be aware that the level of liquidity among these two currency pairings is a lot lower than the liquidity of the majors. Surely, these currencies move faster when their local trading centers are open (Sydney and Wellington) and there is some activity during the trading hours in Europe but the liquidity is extremely low during the Pacific trading session. You also have to be aware of the risk involved in trading these currency pairs. The prices of both Australian and New Zealand dollar can be altered by the news from the financial world very quickly and therefore, a trader has to be careful and alert.
The currencies of the Scandinavian countries are not often in the spotlight when it comes to the foreign exchange market, but they do have their own devotees. Most of the trading is done by pairing them with the Euro. Buying or selling currency pairs that involve theSwedish krona (SEK) make one percent of the daily trades.
Swedish Krona Meet The Minor Currency Pairs
The Central Bank of Sweden is an independent institution and they are in charge of guarding the stability of krona as well as the interest rates. Surely, Sweden is a member of the European Union and as such, they should have appointed the euro as their official currency but they are cleverly avoiding the transition.
Norway is not a member of the European Union and their domestic currency is the Norwegian krone. Even though the daily liquidity of the krone is under one percent, it is still a popular currency during the European trading hours. Norway is a wealthy country with plenty of oil reserves and the price of krone depends on the price of oil. Following the Sweden’s example, the Central Bank of Norway is also independent.
On the other hand, the Danish krone is connected to the euro since the government of Denmark is more Eurozone-oriented. It does have a fixed exchange rate in relation to the euro and the Central Bank is still responsible for the stability of the currency.
A cross-currency pair is a pair which does not include the US dollar as one of the currencies involved in a transaction. But the US dollar still has a minor influence on the exchange rates even though it is not a part of the certain pairing. As an example, the cross-currency pair such as EUR/JPY consists of the second and the third most popular currencies in the world and their price will depend on the exchange rate each currency has when it is set against the US dollar.
Cross-currency pairs are somewhat popular and they make ten percent of the daily trades on the foreign exchange market. The most common cross-currency pairs are previously mentioned EUR/JPY, as well as EUR/CHF and EUR/GBP.
These pairs offer a whole new dimension of the foreign exchange market trading because you have the ability to step back from the US dollar which is dominating the market and expand your horizons since you will have to research and follow the current events from another countries. Also, the prices of these currencies tend to change frequently so if you do your analysis right, you can be very successful.
The minor currency pairs are as important as those belonging to the category of the major currency pairs. They offer a completely different set of challenges to a trader and even though they are not as liquid as the more prominent currencies, you can still trade and make a profit. It has been mentioned that there is more risk involved in trading the minor currencies but in order to stay safe, you simply have to be well-informed, patient, and persistent.