The entire forex market consists of currencies traded in pairs, so one currency against another. Therefore, the value of all the national currencies, trading within the free float regime, is measured against the value of its counterparts.

Thus, the forex market determines how many units of one currency are actually needed for the purchase of one unit of the other currency, the first currency is in pair with.

As an example, it’s good to mentioned the major global currency pairs, most traded by forex traders. There are seven of them every traded should be aware of, having the highest volume:

  • EUR/USD: Euro vs. U.S. Dollar – the top traded currency pair
  • USD/JPY: U.S. Dollar vs. Japanese Yen
  • GBP/USD: U.K. Pound (British Sterling) vs. U.S. Dollar
  • AUD/USD: Australian Dollar vs U.S. Dollar
  • USD/CAD: U.S. Dollar vs Canadian Dollar
  • USD/CHF: U.S. Dollar vs. Swiss France
  • NZD/USD: New Zealand Dollar vs. U.S. Dollar

On the left side of your MT4, you can see the currency pairs with bid and ask prices

Historically, due to the global position of the United States now and before, at the time of leaving the gold standard, the U.S. Dollar has become the top traded currency, used in the international trade or as a secondary currency in countries with weak economies. Therefore, it achieved a special position with the International Monetary Fund and the World Bank, gaining the status of a reserve currency.

The result of dollar’s position is the fact that the value of commodities is also determined against the U.S. dollar and the forex trading with dollar makes over 86% of all the daily forex transactions. This means that the portion of cross currency pairs (so not involving dollar, like EUR/GBP, EUR/JPY, etc.) is relatively small.

As for the system of combination of currency pairs, dollar can be found as a counter currency only in case of EUR/USD, GBP/USD, AUD/USD, NZD/USD. In case of the other currency pairs, it can be found only as the base currency.

 

Specifications of the top 7 global currencies

 

  • EUR/USD – the top traded pair almost every institution is involved in. According to the latest statistics of the Bank for International Settlements (Trennial Survey of BIS from 2016), EUR/USD reached 27% of the total trading volumes on the forex market. This is caused by the extent of GDP of the eurozone and of the United States, supported also by the fact the U.S. Dollar works as a reserve currency and the Euro is also widely used for the same purposes by countries, not willing to keep only dollars to cover themselves.

 

  • USD/JPY – makes around 13% of the total forex trading volume. Japanese Yen is popular for its relative stability, bought during the risk-off sentiment (e.g. during political uncertainties, wars, etc., when traders leave riskier instrument and prefer safer currencies). Japanese central bank tends to be very transparent about its monetary policy.

 

  • GBP/USD – reached around 12% of the total trading volume per day. However, sterling suffers sometimes of low liquidity sessions as sterling is not very popular as a reserve currency, although keeping stability, and is not a safe haven as the Yen, Franc or even Dollar. This pair is also called as the “cable” due to the first Transatlantic cable laid between these two countries.

 

  • AUD/USD – Australian Dollar is one of the commodity currency as the country has an extensive mining sector, following the prices of commodities, adding to the standard fundamentals, impacting the currency. Traders tend to call the currency pair simply as the “Aussie.”

 

  • USD/CAD – Canadian Dollar is another commodity currency, mostly sensitive to oil prices as the country is one of the top oil producers and exporters. With rising oil prices, Canadian Dollar has the tendency to rise as well (so the USD/CAD currency pair tends to drop). This pair is also called as the “loonie” by traders.

 

  • USD/CHF – Swiss Franc is considered as safe haven due to the status of Switzerland and its very stable fundamentals and monetary policy. Therefore, during certain political conflicts, uncertainties, etc., Franc has the tendency to rise at the cost of other currencies’ strength.

 

  • NZD/USD – New Zealand Dollar is the last of the top 3 commodity currencies, affected by their price movements. Moreover, it’s well-known for reflecting the dairy prices. New Zealand dollar is also called the “kiwi” by traders.

Top image: Adobe Stock

Share.

About Author

After finishing law and economic studies, Marek launched his career in Brno, Czech Republic in the financial sector, specializing in capital markets and related legal issues. After 6 years of experience in the industry he moved back to Bratislava, Slovakia, where he worked as an analyst in the forex market for another 3 years. Simultaneously he was a trader focused on the major forex pairs and oil futures.

Leave A Reply