Everyone involved with trading on forex needs to be aware of the currency pairings, how they change, and what their key features are in order to have a full grasp of the way the market works.
There are two types of currency pairings – major and minor. More than a half of daily transactions on the foreign exchange market are done within the major currency pairings. Minor or cross currencies may not be as popular as the majors, but that doesn’t mean they should be ignored.They are usually quoted against a major currency. Majors are the most popular pairings among both novice and experienced traders and the chances are you have already traded them. The fluctuations of these currencies are closely watched because they are the essential ingredients of the forex market.
Surely, these currency pairings are grouped together and the traders are following their changes as such, but in order to make good and smart decisions, one must be aware that these are individual currencies and that there are different factors at work when it comes to their daily worth.
Before we get deeper into the matter, let’s go over some of the terms we will be using in this article. A currency pair is a quotation of the value of a certain currency set against another currency. The first currency which is quoted in a currency pair is called the base currency, while the second is counter or quote currency.
EUR/USD – the most popular currency pair
Even if you are a novice trader with a couple of completed trades, one of them was probably the EUR/USD pairing. It is the most traded currency pair on the foreign exchange market at the moment.
Euro is the official currency used among the countries belonging to the Eurozone. There are eighteen countries within the Eurozone and in 1999 all of them adopted Euro as the official currency. Euro had its ups and downs in the first decade of its existence but it was fairly stable, ensuring its position as the currency with the second largest reserve. Since 2009, the euro has been involved in the debt crisis and numerous reforms were created in order to ensure its stability.
The liquidity of EUR/USD pairing is exceptional in comparison to the other pairings. That is probably because Eurozone is the second largest economic bloc and it attracts both multi-million companies as well as the individual traders. Also, US dollar simply needs to be compared and measured against another currency in order to track its position. Euro is the most logical and obvious choice.
Both short term and long term trades can be done using this pairing. Surely, there are less price jumps due to the high liquidity but a trader simply needs to be patient and make sure they are keeping a close watch on the market changes.
Japanese yen holds the third place among the major international currencies. However, USD/JPY trading requires more effort than EUR/USD currency pairing. Japanese yen is special because it may be going for hours or days without a significant change and then make a sudden price jump. The explanation for this occurrence may lay in the fact that USD/JPY pairing is heavily influenced by the United States interest rate. When the Federal Reserve makes the US dollar stronger, the very value of the USD/JPY currency pairing could potentially increase.
But before you start trading the USD/JPY currency pairing, you need to understand how Japan’s economy really works. Japan is a big exporter and because of that, their economy has a bright future. The worth of Japanese yen is also closely tied to the export and their domestic stock exchange.
If you decide to trade this currency pairing and you want to do it properly, you need to be aware of the situation happening on their stock market. We have previously mentioned that Japanese yen is prone to sudden price changes and in order to predict when the price will jump, you have to identify the influencing factors. If your calculations are right and you make a trade at the right moment, you might be looking at a significant profit.
The pound sterling and US dollar currency pair is the most exciting and thrilling pairing within the major currencies. The price movements are sudden and hard to predict, and that is why this pairing is so charming and alluring to the traders and investors eager for the excitement.
The economy of the United Kingdom is the second largest economy in Europe, and the pound is influenced mainly by trading with the rest of the European continent.
You might be wondering about the difference between EUR/USD and GBP/USD pairings. Well, it has already been mentioned that EUR/USD currency pairing is the most liquid one and the changes in the price are not always significant. However, the price movement within GBP/USD pairing is more extreme. Also, the worth of the pound sterling depends on the news and happenings within Great Britain alone, while euro is influenced by the events from the entire Eurozone. For some reason, the reactions to the news from the Great Britain have an enormous impact on the general position of the pound, while those from the Eurozone are simply acknowledged without a significant effect on the price of euro.
The Swiss franc earned its reputation as the safest currency in the world during the period of Cold War when the fate of the entire planet was hanging by a thread. Switzerland’s well-known neutrality in relation to the conflicts played a big role in securing that position. The recent Eurozone debt crisis reinforced that notion among the traders and wealthy individuals.
If we measure the liquidity, USD/CHF currency pairing is not especially popular on the market. Only 4% of the daily trading is done with these currencies. However, you need to keep in mind that trading with Swiss franc is as challenging and as rewarding as the trading with Great Britain pound. Those traders who know how to do it properly can reap the benefits quickly.
Nicknames for the currency pairings
All of the major currency pairings, as well as the minors, have their own specific nicknames used by the traders. If you are just entering the world of foreign exchange market, you need to be aware of them in order to avoid the confusion.
The nicknames are usually given in relation to a geographical or national significance and association. For instance, GBP/USD currency pairing is often referred to as the cable. The cable may also be used when talking about the British pound itself. The term came from the Transatlantic Cable which was set on Atlantic Ocean’s seabed in 1858. It was used to transmit telegraphs between the United Kingdom and the United States of America. The currency rates were also sent via this cable, ensuring the constant communication between London and New York stock exchanges. This type of communication is clearly not used anymore because we have satellites but the name simply stuck on and it is used daily in the foreign exchange market.
EUR/USD pairing is known as fiber. As we explained in the previous paragraph, GBP/USD is called cable. Since euro is the currency created in the 1990s, the rates were transmitted using the new cable made of optical fibers from the very beginning of its existence. So the term fiber is an update of the cable.
USD/CHF is called swissy for obvious reasons, while USD/JPY is dubbed yen or ninja. Yen is short and simple, while ninja clearly hints to the fact that ninjas originated from Japan.
Australian dollar and US dollar pairing (AUD/USD) is aussie or ozzie.
EUR/GBP is chunnel. Chunnel is derived from the Channel Tunnel, an undersea rail tunnel which links Folkenstone in the United Kingdom with Coquelles which is in northern France. It signifies the connection of the United Kingdom to the continental Europe and therefore, to the Eurozone.
EUR/JPY is euppy or yuppy, while GBP/JPY is geppy or gopher. All of these nicknames aremade by cramming the currency names together, creating a single wordas a result.
NZD/USD pairing is known as kiwi. This nickname is self-explanatory because the term kiwi is also the nickname for the New Zealanders.
Finally, USD/CAD currency pairing is the one with the most nicknames – loonie, the funds, and beaver. Loonie is a bird which can be found on the Canadian coin. The funds was used in the old times in order to separate the Canadian deposits from the deposits of the United States, and beaver is the least used nickname and its source is unknown.
In order to be a successful trader, you simply have to know the list of the major currencies and the pairings. By doing so, you are learning about the market and its liquidity, and understanding the properties of the certain currencies can be of great help in your future trades. Knowing which currency pairs are the risky ones and which are not constantly fluctuating can come in handy when you are deciding on your next trade and how to approach it.