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The foreign exchange market is the largest and most liquid financial market in the world. A wide variety of currency pairs are traded here, but by far not all of them are relevant to traders. Most speculative market participants use the major currency pairs to make profits. To find out which are the most traded currency pairs and why, read this guide.
The total trading volume in the Forex market in 2016 was $5,088 billion – per day. This is an unimaginable magnitude and shows the importance of Forex trading. You can take advantage of the liquidity when trading by trading the currency pairs that are responsible for most of the turnover – although of course it always requires a good strategy. Currency pairs can be divided into three groups according to their trading frequency:
- Majors: Currency pairs that are traded the most
- Minors: Currency pairs that have a lower trading volume; usually without US dollar
- Exotics: rarely traded currency pairs; often consisting of a major currency and a currency from an emerging market or an aspiring developing country
The currencies of strong economies and countries with important financial markets are the “major currencies”. These currencies include the euro, the US dollar, the British pound and the Japanese yen. The Swiss franc is also often counted among the major currencies due to its specific importance for the financial market. The most important secondary currencies include currencies from resource-rich countries such as Canada and Australia.
In Forex trading, the most common currency pairs look as follows:
- EUR/USD: Euro and US dollar
- USD/JPY: US dollar and Japanese yen
- GPD/USD: British pounds and US dollars
- USD/CHF: US Dollar and Swiss Franc
- USD/AUD: US dollar and Australian dollar
- USD/CAD: US dollar and Canadian dollar
The most important currency pair remains EUR/USD. Even though the shares have shifted, buying and selling this pair is still the most important, accounting for 23% of trading volume. The USD/JPY pair is close behind with 17.7%. The GPD/USD still accounts for 9.2% and the USD/CHF is already a bit off the mark at 3.5%. This currency pair has even been overtaken in recent years by trading in the secondary currencies (see table). In the following we will explain the most important currency pairs in more detail.
The global currency USD
The US dollar has a special role in the global financial world. It is considered a world currency because most international transactions are settled in US dollars, and is also the most important reserve currency. The price of gold is set in US dollars and the OPEC countries’ trade in oil is also conducted in the US currency. These factors make the US dollar the most important currency in the world, which is why the US dollar is also involved in most foreign exchange trading.
The fact that the euro-US dollar pair is the most traded pair is also due to the strength of the economies the two currencies represent. While the member states of the EU are responsible for 16.7% (2016) of global GDP, the USA accounts for 15.5%. Although China’s share is higher at 17.8 %, because the Chinese yuan, also known as the renminbi, is pegged to the US dollar and is not completely freely tradable, it plays only a minor role in the Forex market.
The Japanese yen is considered the most important Asian currency. Due to Japan’s economic strength – the fourth largest contributor to global GDP, ahead of Germany – and strong trade relations with the US and Europe, but also other Asian countries, many companies have to exchange their local currencies for yen and vice versa. As a result, the USD/JPY pair is one of the most traded currency pairs in the Forex market.
The British pound plays an important role in global financial markets. When Great Britain was still a world and leading economic power, the British pound was considered a reserve currency. But even today, Great Britain is still one of the strongest economic countries in the world and the currency continues to play an important role. The financial sector accounts for over 10 % of GDP in the UK, so the financial markets play a major role in the British economy. This is another reason why the GPD/USD currency pair is traded briskly.
The most important secondary currencies are the so-called commodity currencies. These include Australia due to its rich deposits of gold, coal, aluminium and iron. There is also a large agricultural and service sector. Due to its isolated geographical location and small population, Australia is dependent on importing many goods. Global trade also leads to high trading volumes of the USD/AUD pair in the foreign exchange market.
Canada is also rich in natural resources (natural gas, oil, wood), which is why the Canadian dollar is also one of the commodity currencies. The most important trading partner of the Canadians is of course the USA due to its geographical location. Since most exports from Canada go to its immediate neighbor, economic changes in the USA also have a major impact on Canada. For example, low economic growth in the USA can have a negative impact on Canada’s export figures.
The Swiss franc is also very important on the capital markets. The Swiss franc is generally regarded as a “safe haven” because Switzerland is known for its political neutrality and its stable and discreet banking system. Many investors hold parts of their portfolios in Swiss francs and it is not unusual for investors to convert their capital into Swiss francs during international crises.
Since the economic and political conditions in the countries of the main currency are basically stable, the “major currencies” are best suited for forex trading. Although trading opportunities also arise with other currencies, newcomers in particular take a lower risk than with the less frequented currencies.
Technical analysis of the major currencies is also easier, as there are fewer unexpected price fluctuations. In addition, the high liquidity of the major currency pairs ensures that supply and demand are constantly available. If you want to know more about how forex trading works, you can find all the important information here.
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