What are major, minor and exotic currency pairs in derivative market.
The most traded currency pairs in the world are called the Majors. The list includes
following currencies: Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Pound Sterling
(GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and the Swiss Franc (CHF).
Unlike any other traded asset class, the most significant part of currency market is the
concept of currency pairs. In currency market, while initiating a trade you buy one
currency and sell another currency. Therefore same currency will have very different
value against every other currency. For example, same USD is valued at say 45 against
INR and say 82 against JPY. This peculiarity makes currency market interesting and
relatively complex. For major currency pairs, economic development in each of the
underlying country would impact value of each of the currency, although in varying
degree. The currency dealers have to keep abreast with latest happening in each of the
country
These currencies follow free floating method of valuation. Amongst these currencies the most active currency pairs are: EURUSD, USDJPY, GBPUSD, AUDUSD, CADUSD and USDCHF.
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| Currency pair. |
US Dollar (USD)
The US Dollar is by far the most widely traded currency. In part, the widespread use of the US Dollar reflects its substantial international role as “investment” currency in many capital markets, “reserve” currency held by many central banks, “transaction” currency in many international commodity markets, “invoice” currency in many contracts, and “intervention” currency employed by monetary authorities in market operations to influence their own exchange rates.
In addition, the widespread trading of the US Dollar reflects its use as a “vehicle” currency in foreign exchange transactions, a use that reinforces its international role in trade and finance. For most pairs of currencies, the market practice is to trade each of the two currencies against a common third currency as a vehicle, rather than to trade the two currencies directly against each other. The vehicle currency used most often is the US Dollar, although very recently EUR also has become an important vehicle currency.
Euro (EUR)
Like the US Dollar, the Euro has a strong international presence and over the years has
emerged as a premier currency, second only to the US Dollar.
Japanese Yen (JPY)
The Japanese Yen is the third most traded currency in the world. It has a much smaller
international presence than the US Dollar or the Euro. The Yen is very liquid around the
world, practically around the clock.
British Pound (GBP)
Until the end of World War II, the Pound was the currency of reference. The nickname
Cable is derived from the telegrams used to update the GBPUSD rates across the
Atlantic. The currency is heavily traded against the Euro and the US Dollar, but it has a
spotty presence against other currencies.
Swiss Franc (CHF)
The Swiss Franc is the only currency of a major European country that belongs neither
to the European Monetary Union nor to the G-7 countries. Although the Swiss economy
is relatively small, the Swiss Franc is one of the major currencies, closely resembling the
strength and quality of the Swiss economy and finance. Switzerland has a very close
economic relationship with Germany, and thus to the Euro zone.
Typically, it is believed that the Swiss Franc is a stable currency. Actually, from a foreign
exchange point of view, the Swiss Franc closely resembles the patterns of the Euro, but
lacks its liquidity.
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The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.
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That’s it for this post. Do check out my other posts to gain more knowledge about finance.
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