When it comes to Forex or currency trading, there are several currency options that traders get. The traders see the currencies as pairs, which they could consider exchanging for assured profits. Some of them are efficient enough to yield profits while some pairs are disappointing. Those currency pairs that are most popular among traders and grab most of the attention are major currency pairs.
There are four major currency pairs in Forex trading. The most common is EUR/USD, which is the abbreviated form of the Euro and the USA dollar. The second and third is the USD/JPY and GBP/USD respectively. The fourth major currency pair is the USD/CHF, the latter abbreviation being used for the Swiss Franc.
Why Are Above Currency Pairs Considered Major?
America and the European Union are the two most economically stable nations, which makes the currencies of both the countries world’s first and the second most popular currency. Hence, the pair of US dollar and EURO is most actively traded in the industry.
The USD/JPY is the next major currency pair given to Japan being the largest economy in Asia. The country is one of the major exporters in the world and hence exchanging Japanese Yen is quite active in Forex trading.
The Great Britain Pound has a vital role to play as far as international financial markets are concerned. This makes it quite likely for traders to pair it against the US dollars. The USD/CHF is yet again the major pair as Switzerland, to which the latter currency belongs, is considered as the most stable and safe nation all across the globe
Minor Currency Pair
Now when you already know what makes a currency pair major, you must also have the knowledge of what makes a currency pair minor. A currency pair that does not include US dollar is called minor currency pair. You can also call it cross-currency pair.
Some of the minor currency pairs include EUR/GBP (EURO/Great Britain Pound), EUR/AUD (EURO/Australian Dollars), GBP/JPY (Great Britain Pound/Japanese Yen), NZD/JPY (New Zealand Dollars/ Japanese Yen), GBP/CAD (Great Britain Pound/Canadian Dollars). In forex trading, minor currency pairs normally include the EURO, Yen or Great Britain pound.
Why No US Dollar Makes a Currency Minor?
America is one of the most developed nations with excellence in trade and marketing. Hence, US dollar is the most actively traded currency in Forex trading. It has been observed that the American dollars are used to a great extent in settling international transactions. It is considered as the reserve currency of the world.
The significance of US dollar can be mapped with rest of the nations around the world struggling to take their currency value to the American dollars. In addition, whenever global central banks have to hold foreign currency reserve, they prefer holding the reserves in US dollars. Hence, USD is given a unique position in the Forex trading industry.
Exotic Currency Pairs
Besides major and minor currency pairs, there are some other types of pairs that fall under the exotic currency pair category. This type of pairing includes the blend of a major currency and the currency of a developing country. As a beginner, you must know that exotic currency pairs are traded considerably less than their two counterparts.
Some of the exotic currency pairs include EUR/TRY (EURO/Turkish Lira), USD/HKD (USA Dollar/ Hong Kong Dollar), JPY/NOK (Japanese Yen/ Norwegian Krone), NZD/SGD (New Zealand Dollar/ Singapore Dollar), GBP/ZAR (Great Britain Pound/ South African Rand), AUD/MXN (Australian Dollar/Mexican Peso).
Why Are The Pairs Exotic?
Due to the less actively traded feature, exotic currency pairs are not so popular. This leads to the high cost of trading if you choose these pairs. There is a significant lack of liquidity so far as exotic currency pair trading in the market is considered.
The developing countries like Hong Kong and Singapore as well as European nations out of the Euro zone are still struggling to get recognition on the global platform. They are undoubtedly strong enough but they are yet to become a larger economy. Hence, stronger currencies paired with the currencies of these smaller economies are considered exotic currency pairs.