What are the major forex pairs – and why are they so popular?
EUR/USD, or eurodollar, is by some distance the world’s most traded currency pair – perhaps unsurprisingly, seeing as it pits the world’s biggest economy (the United States) against its second biggest (the European Union). It’s also the youngest of the majors, with the euro only seeing real circulation in 2002.
The two biggest drivers of eurodollar volatility are the Federal Reserve and the European Central Bank (ECB), and in particular the interest rates set by both bodies. If the Fed raises rates, for instance, it will usually make the US dollar stronger and cause EUR/USD to drop in price.
The popularity of EUR/USD ensures that it is always highly liquid – meaning that spreads tend to be competitive and offers to buy or sell are easy to find.
The first thing that many traders will notice about the USD/JPY is that the value of a single pip is much larger than for the majority of currencies. This is because of the relatively low value of the yen against the dollar.
The yen is often used as one half of a carry trade, where a trader borrows money in a country that has low interest rates and invests in a country that has higher ones. The Bank of Japan has had to combat low inflation and growth for many years, and as a result has often imposed near-zero or even negative interest rates at many points.
That has also led to the yen’s widely recognised status as a ‘safe haven’ – which can see the gopher rise in times of economic uncertainty. Many traders also see the dollar as a haven, though, which can complicate these moves.
Cable gets its name from the undersea cables that used to carry bid and ask quotes across the Atlantic ocean, a reference to the pair’s venerable past. Before the US dollar took over, sterling was used as the world’s reserve currency.
GBP/USD and EUR/USD share many similarities. Firstly, although the UK has never been part of the euro, its economic strength is still hugely tied to the European Union. And secondly, unlike with USD/CHF and USD/JPY, the dollar acts as the quote currency in both cable and eurodollar. That means that both pairs can often rise when the dollar is weak, and fall when it is strong.
Like all forex pairs, the policies of the central banks with oversight over the two currencies in GBP/USD – in this case the Bank of England and Federal Reserve – will have a major bearing on its price.
The presence of the Swiss franc among the top four currencies can look a little odd at first glance. After all, Switzerland isn’t a major global economy – unlike the eurozone, Japan and the UK.
Like the yen, the Swiss franc owes much of its popularity to its status as a safe haven investment. That makes it a popular currency in times of economic uncertainty or market turmoil, as traders seek markets that are perceived as lower risk. Switzerland’s long-held reputation for stability, safety and neutrality ensures that for many it fits the brief perfectly.
When market volatility is low, the Swiss franc will usually tend to follow the market movements of the euro, due to the close economic relationship that Switzerland has with the eurozone.
The aussie, loonie and kiwi are often referred to as ‘commodity currencies’, reflecting the important role that natural resources play in the economies that they represent. For AUD/USD, that mostly means mining, as well as farming of beef, wool and wheat.
So commodity prices can have a big part to play in the movements of AUD/USD – alongside the interest decisions made by the Reserve Bank of Australia (RBA), who tend to favour higher rates than some other major central banks.
Once again, commodity prices can have a large impact on the price movements of the loonie, thanks to the abundance of timber, natural gas and oil found in the world’s second largest country.
However, USD/CADhas an interesting unique wrinkle, in that the performance of the Canadian dollar is closely tied to that of the US economy. Because of this, in minor pairs like EUR/CAD the Canadian dollar can perform similarly to its US counterpart – but when paired with the US dollar, price movements can be harder to predict.
The final major commodity currency is the New Zealand dollar against the US dollar, or the ‘kiwi’. Agriculture – as well as international trade and tourism – is key to the New Zealand economy, so the price movements of soft commodities will often play out on NZD/USD.
Like all currency pairs, though, the role of both central banks shouldn’t be underestimated. In this case, the Reserve Bank of New Zealand sets interest rates that can have a major impact on NZD/USD, especially when they don’t line up with what the Fed is doing.
A key currency pair that explores the relationship between the UK and the eurozone. EUR/GBP became especially interesting after the UK voted for Brexit on 23 June 2016.
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