In this article, you’re going to find out what instruments the majority of investors/traders use in the forex market, and also the cool facts that surround these individual units.
What is a Major?
In simple terms, a major is a FREQUENTLY traded (liquid) currency. The US dollar, the Great British Pound, the Australian dollar, the Japanese Yen and the Swiss Franc are generally considered to be major currencies. Since we trade forex, however, these major currencies are traded in pairs i.e. currency pairs. For those new to the business, here’s a little heads up on what a currency pair is:
‘The forex market is traded in pairs. The EUR/USD, the GBP/USD and the AUD/USD are all major currency pairs. The ‘base currency’ is the first currency that appears in a currency pair quotation. The EUR, GBP and AUD (highlighted in bold) are all base currencies. The ‘quote currency’, or ‘counter currency’, is the second currency: the US dollar (underscored).’
As an example, let’s say that the EUR/USD pair is currently trading at 1.30 even right now. The ‘base currency’ is the EUR and the ‘quote currency’, or ‘counter currency’ is the US dollar. In order to buy (long/bid) this instrument (you believe the EUR will advance against the dollar) it would cost $1.30 to buy a single unit of EUR. To short/sell the EUR (which means that you think the EUR will weaken in value against the US dollar), you’d be selling at a slightly lower price than the bid. In both circumstances, your entry price (P/L) will be negative as the spread (represents brokerage costs) has been attached to your order. The market will have to move in your favour by the distance of the spread in order for the position to show zero.
The BIG four
The four core major currency pairs, in our opinion, are the EUR/USD, GBP/USD. USD/CHF and USD/JPY. Each market has their own unique characteristics.
The EUR/USD pair, sometimes called ‘Fiber’, is the most actively traded instrument in the market. The popularity is due to the fact that it’s made up of two humongous economies: Europe and the US. Given that the EUR/USD accounts for more than 27% of all the trading volume worldwide, it’s rare to witness any large gaps form.
Trading this market is a favourite among speculators as it offers several advantages. One in particular is the spread. It has an extremely tight spread, and this is typically due to the unit being incredibly liquid.
This market also tends to respond aggressively to Fed/ECB announcements, inflation numbers, employment and retail sales data. Furthermore, the pair has an inverse correlation with the USD/CHF and the US dollar index. The US dollar index is a geometric weighted average of a basket of foreign currencies against the dollar.
Sometimes called ‘Cable’ or ‘Sterling’, this currency pair is also one of the most liquid markets in the forex world, accounting for about 12% of the overall trading volume. A developed capital market coupled with the UK’s reputation in handling monetary policy certainly contributes to this.
The pair has a tendency to correlate with the EUR/USD pair, and inversely correlate with the US dollar index and the USD/CHF. Furthermore, this market is very sensitive to high-impacting events out of the UK and the US, in particular BoE/Fed announcements, inflation data, retail sales and employment figures.
The Swiss Franc is often referred to as a safe-haven currency. The reputation of Switzerland as a stable country with sound economic fundamentals adds to the reputation of the Swiss Franc for being a safe haven amongst currencies. Therefore, the Swiss Franc is generally expected to increase in value in times of volatility, especially in the equity markets.
This market, in our opinion, is a much less volatile instrument to trade than that of the EUR or GBP/USD. The USD/CHF, or ‘Swissy’, as some traders refer to it as, tends to have a negative correlation with the EUR/USD- GBP/USD currency pairs and typically tracks movements in the US dollar index. This is primarily due to the positive correlation of the EUR, Swiss franc and British pound.
Following the US dollar and the EUR, the Japanese Yen is the third most actively traded currency in the forex market, accounting for about 13% of the overall market volume. The USD/JPY, sometimes referred to as ‘the Gopher’, tends to have a positive correlation with the USD/CHF and USD/CAD, as well as tracking movements in the S&P 500 and the DOW Jones Industrial Average Index.
This market is extremely volatile at times and shows an incredible amount of sensitivity to changes in the US interest rate. Let’s not forget that after China, the Japanese government hold the most US debt, and any changes in yield can severely affect the cash flow of the Japanese government.
Although the forex market has several pairs to choose from, the above four are some of the most traded. Does this mean that one should only look to trade these units? Certainly not, there are a plethora of ‘minor’ and ‘exotic’ currency pairs to choose from, like the EUR/GBP, EUR/AUD and the USD/SEK (Swedish Krona). Why limit the opportunities?