Trading in Forex, which is short for Foreign Exchange, has surged in popularity in the 21st century amongst individual retail traders who trade on both a professional and non-professional basis. Although FX trading (as it is also known) has been an important part of the larger banking system for centuries, this area has long been inaccessible to the individual. The ownership of stocks and shares and even government bonds became more accessible for the individual through the 20th century, but it was only with the explosion of Contract for Difference trading into the 21st century that made it a viable trading option for the retail trader.
In this guide, we are going to look at:
What is Forex?
Foreign exchange or currency trading is also known as Forex to FX trading and is the interchange of one currency for another, and it is this exchange that separates currency trading from other asset classes. When you trade Forex, you are anticipating that one currency will fall or rise relative to another currency. Foreign exchange trading is a trade of “relative value”, meaning that you look for one currency to depreciate or appreciate in value relative to another currency. So, Forex trading requires us to select which currency we anticipate will rise in value and which currency we predict may fall in value and, critically, relative to each other.
You can learn more about Forex and currency trading here.
What are the “Majors”?
The “Major” currency pairs are some of the most common currency combinations in the Forex market. Although there is no definitive list of what the “Majors” are, any list will certainly include the four traditional “Majors, which are EUR/USD, USD/JPY, GBP/USD and USD/CHF. In addition, the largest of the traded “commodity currencies”, USD/CAD and AUD/USD also make our top six list (it could be argued that NZD/USD would be the seventh name on the list). You will notice that all of these “Majors” are made up of individual currencies relative to the US Dollar.
Let’s look at our 6 Major Currency Pairs in Forex.
EURUSD signifies the number of US Dollars needed to purchase one Euro. EURUSD is seen as the most important Forex pair as USD and EUR are the two most-traded currencies globally and also the first and second-largest reserve currencies. The Euro was launched in 1999, originally replaced 11 national currencies and now is used in 19 European countries by over 300 million individuals.
The US Dollar is the primary reserve currency globally and dominates international trade. The supply of US Dollars is controlled by the US central bank, the Federal Reserve. Although the US Dollar has been forecast to eventually surrender its dominant global position to the Euro, the US currency remains a safe haven in times of crisis and the key global reserve currency.
The Japanese Yen is the third most traded currency globally and a popular reserve currency. The population of Japan is around 40% of the US, its economy is relatively large. The Bank of Japan controls the supply of the Yen. The Yen is seen as an ultimate safe-haven currency (even more so than the US Dollar) in times of global stresses. This is because of various factors, including the super low-interest rates in Japan since the 1990s, repatriation pressures from its positive net foreign asset position and historical, traditional reasons.
The British Pound is the oldest currency globally that is still in circulation. It is also the third most popular reserve currency (after the US Dollar and Euro), plus the fourth most traded currency. With the UK leaving the EU after Brexit in 2020, the Pound is unlikely to adopt the Euro any time soon. The Pound versus US Dollar exchange rate, GBPUSD, is commonly known as Cable in the Forex world, which comes from the 19th century when the exchange rate was transmitted across the Atlantic by a submarine cable.
The Swiss Franc is also known in the currency trading world as the Swissie, and the currency code, CHF, comes from the old Latin name for Switzerland, Confoederatio Helvetica with the F standing for Franc. Switzerland is one of Europe’s most productive and stable economies, with the Swiss Franc also backed up by large gold reserves. The Swiss have resisted converting to the Euro, or even joining the EU. The stability of the Swiss Franc is one of the reasons, alongside its traditional neutral positive with respect to global conflicts, that makes the Swiss Franc another safe haven currency.
The Canadian Dollar has the name Loonie in the world of Forex trading, which is the name of the Canadian one-dollar coin, which has an image of a common bird in Canada, the loon. The Canadian Dollar is closely correlated with the US Dollar by virtue of the fact that their economies are very closely tied to each other as neighbours. 85% of Canada’s exports go to the US, while Canada imports about 50% of their goods and serves from the US. Some of Canada’s biggest are oil and timber, with one of the main factors influencing the Canadian Dollar’s value is the oil price. For this reason, the Canadian Dollar sits in a basket of currencies referred to as commodity currencies.
The Australian Dollar was introduced in 1966 to replace the Australian Pound and is the currency of the Australian Commonwealth (which includes Australia, seven dependent territories and three countries). Today, the Australian Dollar (AUD) is one of the most traded currencies globally (fifth behind USD, EUR, JPY and GBP). The Australian economy is a large producer and exporter of raw materials, including Iron Ore, Coal, Petroleum Gas, Gold and Aluminium Oxide. For this reason, like the Canadian Dollar, the Australian Dollar is referred to as a commodity currency.
Major Forex Pairs: A summary
So, having explored the 6 Major Forex Currency Pairs, you should now be confident to be able to step into the Forex trading world and place your first Forex trade with Hantec Markets.
|Forex pair||Known as||Central Bank|
|EUR/USD||The Euro||European Central Bank (ECB)|
|USD/JPY||The Yen||Bank of Japan (BoJ)|
|GBP/USD||Cable||Bank of England (BoE)|
|USD/CHF||The Swissie||Swiss National Bank (SNB)|
|USD/CAD||The Loonie||Bank of Canada (BoC)|
|AUD/USD||The Aussie||Reserve Bank of Australia (RBA)|
|US Dollar||The Dollar||Federal Reserve|