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MAJOR FOREX PAIRS DEFINITION AND LIST
Forex is the world’s largest financial market with a daily capitalization of $8.6 trillion as of May 2021. Unlike other markets where investors exchange tangible or intangible commodities such as stocks, precious metals or energy sources, the forex market allows its participants to trade money, typically currency pairs. Of which, major forex pairs are most heavily traded. So, what are the majors? And how many major pairs can you trade in forex? Answers will be detailed in this article.
What are the Majors in Forex?
The Definition of Major Forex Pairs
As already mentioned, major currency pairs, commonly known as “majors”, include the most traded pairs in forex. They are made up of top eight currencies involving the US dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), Swiss franc (CHF), Australian dollar (AUD), Canadian dollar (CAD) and New Zealand dollar (NZD). Of which, the US dollar always retains its dominant position, being on one side of 88% of foreign exchange transactions. That is why major currency pairs always contain the US dollar therein.
Actually speaking, when it comes to majors, traders often think of EUR/USD, USD/JPY, GBP/USD and USD/CHF as those pairs are traded with the largest trading volume in the forex market. Therefore, beginners who trade those pairs would be less subject to price fluctuation when the market goes against their favor.
Further, AUD/USD, USD/CAD and NZD/USD can be considered “majors” although they are more frequently called commodity currency pairs. AUD, CAD and NZD all come from commodity-based economies, so they are significantly affected by the merchandise price.
Reasons Why Investors Trade Major Forex Pairs
Compared to crosses (also called minors) and exotics, majors are highly preferred by less experienced investors for some reasons. Particularly, major forex pairs are often traded in a large trading volume. Accordingly, the difference between the bid price at which purchasers are willing to pay and the asking price that sellers accept would be minor. In other words, the spreads of those majors are always tight in normal market conditions. Being seen as transaction costs paid to forex brokers, narrower spreads would attract much more investors to trade majors. In return, this keeps the supply and demand of those pairs always high.
Large trading volume also allows speculators to open and close a position with ease. Even when they enter the market with large position sizes, the exchange rates of those major forex pairs do not vary too much. For example, when you open a 200,000-unit position of EUR/USD at the bid price of 1.19583, you can easily find sellers who provide you with the required volume at a similar price. Meanwhile, it is more challenging to buy or sell a large position of lower volume-traded currency pairs (e.g. exotics) without significant changes in their value.
Thereby, major currency pairs are said to have higher liquidity and lower volatility than crosses and exotics. Hence, trading majors is seen as a safe option for those who recently join the forex market because they will face a lower risk of losing money when the market moves in their unexpected direction.
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Key Factors Behind the Price Movement of Major Pairs
Given major currencies are regarded as “free-floating currencies”. This means their prices are identified by supply and demand which are profoundly affected by the following factors:
Financial releases that report upcoming economic news or economic indicators would give investors an in-depth insight into the current economic situation and future expectations of a country.
Normally, major news announcements are regularly updated on an economic calendar available on the websites of forex brokers. They can include the release of interest rates by the national central banks or the declaration of important indicators such as CPI (Consumer Price Index), GDP (Gross Domestic Product), employment rate and so forth.
The economic calendar on FiNMAXFX
Supply and demand of a currency are also significantly influenced by the political stability of the country. Accordingly, such politics-related factors as elections, modifications in policies or trade wars can depreciate or appreciate the value of major currencies.
In general, forex investors can observe economic and political news to make fundamental analysis and subsequently predict how the price will move in the future. Although the value of major currencies is mostly affected by the supply and demand of traders, central banks and governments sometimes intervene to control the price in case the market moves in a way that causes economic harm.
Major Forex Pairs Definition and List
As previously stated, major forex pairs include a total of seven traditional majors and commodity currency pairs. Of which, the most traditionally popular currency pairs in the market are EUR/USD, USD/JPY, GBP/USD and USD/CHF. Meanwhile, due to the growing popularity of commodity currencies, AUD/USD, USD/CAD and NZD/USD are implicitly described as majors as well.
EUR/USD is the most commonly traded currency pair in the world. It compares the value of the base currency (the euro) being quoted against the offer currency (the US dollar). Accordingly, if you open a long position of EUR/USD at the bid price of 1.19583, you have to pay off $1.19583 to purchase €1. The pair is more popular, especially among novice investors than other majors because it represents the two biggest economies: the European economy and the US economy which back up the euro and US dollar respectively. Therefore, it is less volatile and more liquid than other pairs, leading to tighter spreads offered by forex brokers and other market makers.
However, this does not mean there is no large fluctuation in the exchange rate of EUR/USD. The advent of important events such as the US-China trade war or the US election result would introduce the instability of the pair, which can be exploited by experienced investors to gain bigger profits. Though, jumping in trading the pair in such abnormal market conditions can be a detriment to novice traders who lack the experience to deal with the high volatility of the market.
Over years, the Bank of Japan (BoJ) has attempted to fight against low inflation and keep interest rates low. Therefore, the USD/JPY pair is more frequently transacted by carry traders who tend to borrow low-yielding currencies to invest in countries with high-interest rates. In this case, the Japanese yen is sold to speculate on the US dollar.
Thanks to a unique economy and financial policies of the Japanese government, the yen has become a safe haven currency whose value is expected to remain unchanged or increase when the world comes into serious geopolitical conflicts.
Unlike other majors, the exchange rate of USD/JPY goes out to two decimal places, for example, 104.544 as the bid price. So, the value of a single pip in the pair is much higher than that of other majors and equivalent to 0.01.
Previously, GBP/USD is highly correlated with EUR/USD as both European and British economies were closely tied to each other. However, Brexit tensions at the end of January 2020 and consequently unsolved important issues between the UK and the EU puts more pressure on the British pound. This profoundly affects the price movement of GBP/EUR. Having said that, GBP still remains in its fourth position in the top most popular currencies.
The best time to trade the pair is 2 PM GMT+0 when both London and New York sessions cross and the high liquidity of GBP/USD is recorded.
Similar to the yen, the Swiss franc is considered a safe haven investment when there is economic uncertainty or political turmoil. As a G10 member, Switzerland holds a long-standing reputation for security, economic stability and neutrality. Also, despite not being a part of the European Union, the country has a good relationship with the eurozone. Therefore, in case of low volatility, the Swiss franc will tend to move favorably with the euro.
Commodity Currency Pairs
The value of the Australian dollar is greatly influenced by the price of mining commodities (e.g. coal, iron ore and copper), beef, wheat and wool. So it is called a commodity currency and any fluctuations in the value of those products can change the value of AUD/USD. Moreover, when the US dollar is strengthened, it means cheaper Australian exports and hence Australian suppliers receive less money for their merchandise.
Also, the Reserve Bank of Australia (RBA) can step into the market to control the Australian dollar, thus impacting the pricing of AUD/USD.
If you plan to trade USD/CAD, you should keep an eye on the price of natural resources such as natural gas or timber, especially oil as this energy source is the main export of Canada. Consequently, any changes in the world’s oil price would dramatically affect that of this country. Typically, enormous delays in various activities, especially transportation due to the Coronavirus epidemic, have resulted in the change in OPEC production quotas. This partially depreciates the value of the Canadian dollar and makes USD/CAD move on the bearish trend.
Agriculture, international trade and tourism are closely tied to changes in the value of the New Zealand dollar. In addition, both the Federal Reserve and Reserve Bank of New Zealand have major impacts on NZD/USD when they announce interest rates and other monetary policies. Therefore, their roles should not be underestimated and traders who want to open a position with the pair should be well-informed about any policies of those central banks before trading.
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