Understanding Currency Pairs

There are as many currency pairs as there are currencies in the world. The total number of currency pairs that exist changes as currencies come and go. Currency pairs are classified according to their trading volume and can be grouped into four categories: major, commodity, minor, and exotic.

The major currencies, also known as the “majors,” are considered to be the most heavily traded and widely available currencies in the world. These currencies are often considered to be the most stable and their economies are generally considered to be the most developed and robust. The major currencies include the U.S. dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), and the Australian dollar (AUD). These currencies are often used as the base currency in currency pairs and they are also used as a benchmark for other, less widely traded currencies. The reason these currencies are considered major is because these countries are considered as major economies and also because of their role in international trade and finance. Due to their liquidity and popularity, major currencies often have low spreads and high trading volume, making them more attractive for traders and investors to trade.

The EUR/USD is a major currency pair, which is the euro against the U.S. dollar. This is one of the most heavily traded currency pairs in the world because the Eurozone and the United States are two of the largest and most developed economies in the world. Another example is the USD/JPY, which is the U.S. dollar against the Japanese yen. This currency pair is also widely traded because Japan is the third-largest economy in the world.

A commodity currency is a term used to describe a currency that is closely tied to the price of a specific commodity, such as oil, gold, or agricultural products. The value of a commodity currency tends to fluctuate in response to changes in the price of the commodity to which it is tied. This is because the country whose currency is tied to the commodity is likely to be a major producer of that commodity, and changes in the commodity price will therefore have a significant impact on the country’s trade and economic performance. Examples of commodity currencies include the Canadian dollar, which is closely tied to the price of oil, and the Australian dollar, which is closely tied to the price of commodities such as iron ore and coal.

An example of a commodity currency pair is the Australian dollar (AUD) and U.S. dollar (USD) pair, also known as AUD/USD. Australia is a major exporter of commodities such as iron ore, coal, and gold, and therefore the value of the Australian dollar is closely tied to the global commodity market. Fluctuations in the price of these commodities can have a significant impact on the value of the AUD, and traders and investors may use the AUD/USD pair to speculate on movements in the commodity market.

A minor currency, also known as a cross currency, is a currency that is not as widely traded or in as much demand as the major currencies. These currencies are typically from smaller or emerging economies and may have lower trading volumes and wider spreads compared to the major currencies. Examples of minor currencies include the Mexican peso (MXN), the South African rand (ZAR), the Norwegian krone (NOK), and the Hong Kong dollar (HKD).

An exotic currency is a less commonly traded currency that is from a country or region with a smaller or emerging economy. These currencies tend to have lower trading volumes and wider spreads compared to major and minor currencies. Examples of exotic currencies include the Turkish lira (TRY), the Brazilian real (BRL), and the Indian rupee (INR). Due to the lack of liquidity and higher volatility, trading exotic currencies may carry more risk than trading major or minor currencies.

A cross currency pair, also known as a “cross rate,” is a currency pair that does not include the U.S. dollar (USD) as either the base or the quote currency. For example, if the EUR/GBP pair is traded, it is a cross currency pair because neither the EUR nor the GBP is the US dollar. The value of the currency pair is determined by the relative value of the two currencies involved. Cross currency pairs are less liquid than major currency pairs that include the US dollar. This is because they are not as widely traded and there is less demand for them in the market. They are typically categorized as other a major cross currency pair, or a minor cross currency pair.

A major cross currency pair is the EUR/GBP, which is the Euro against the British pound. This pair is considered a major cross currency pair because it involves two currencies that are considered to be major currencies themselves, like the Euro and the British Pound. Due to the fact that these currencies are still major and have good liquidity, these major cross currency pairs tend to have a lower spread and higher trading volume, making them attractive for traders and investors.

A minor cross currency pair is considered less popular and less liquid than major cross currency pairs. An example of a minor cross currency pair would be the AUD/NZD (Australian dollar versus New Zealand dollar). These currency pairs are typically less actively traded and have wider bid-ask spreads compared to the major cross currency pairs.