The Importance of Major Pairs

The foreign exchange market is a place where trading in all currencies takes place. However, the volume of trade that takes place in different currencies varies greatly. Although there are hundreds of currencies in the world, about two-thirds of the massive $4 trillion foreign exchange trading volume is transacted in just 4 currency pairs! These 4 pairs are referred to as the major currencies. The movement of these pairs is the most watched metric in the forex market and is considered the general barometer of the market. Therefore, when forex experts talk about the forex market in general rising or falling, they refer to these pairs. In this article we will take a closer look at the 4 most important currency pairs.

EUR/USD:
The EUR/USD currency pair is the most actively traded currency pair in the world. Almost all the leading banks in the world have their own traders who trade EUR/USD exclusively. Despite the fact that the euro was introduced as a currency only recently, it has gained enormous importance and has become a part of the most traded currency pair in the world.

It is important to understand that in the EUR/USD pair, the euro is the base currency. This means that all contracts related to EUR/USD are denominated in Euro. In contrast, the price movements and profit and loss calculations are denominated in the US dollar.

And since the US dollar is the more accepted and liquid of the two currencies, all margin payments must usually be made in USD!

Trading this currency pair has several advantages. One of these advantages is the fact that the spreads on this pair are the lowest. This means that transaction costs are minimal when trading the EUR/USD pair. This lower spread is due to the fact that the EUR/USD pair is the most liquid currency pair in the world and there are several traders and market makers that constantly offer rates for this pair.

USD/CHF:
The Swiss franc is considered the safe haven of currencies. Therefore, the USD/CHF currency pair falls in value when the world considers the US dollar as a safe haven. However, when the dollar seems to be in danger, investors like to invest in the Swiss franc. It should be noted, however, that the value of this pair depends largely on the capital flows in the Swiss banking system, which is known worldwide for its secrecy! Switzerland’s reputation as a stable country with solid economic fundamentals also contributes to the Swiss franc being considered a safe haven among currencies.

USD/JPY:
The Japanese yen is the third most traded currency in the world after the US dollar and the euro. Therefore, the USD/JPY currency pair is of great importance. According to some estimates, trading in this currency pair alone accounts for about 20% of foreign exchange trading in the world. Moreover, it is important to realise that USD/JPY is an extremely volatile currency pair. It is notorious for moving within a trading range for a long period of time and then showing sudden fluctuations when it reaches a new homeostasis at a different price level. This currency pair is most sensitive to changes in interest rates in the US. This is because the Japanese government holds a large amount of U.S. debt, and any change in the yield has a strong impact on the Japanese government’s cash flow.

In this case, the U.S. dollar is the base currency. Therefore, all contracts referencing USD/JPY are denominated in U.S. dollars. However, the price movements and profit and loss calculations are denominated in Japanese yen.

Again, since the US dollar has unmatched liquidity, margin is always collected in USD.

GBP/USD:
The UK economy is one of the most important economies in the world, and the trading relationship between the British pound and the US dollar is of utmost importance. This pair is one of the oldest currency pairs traded on the market. As such, it has a nickname and is referred to as “Sterling”

Sterling has a huge trading volume, and the GBP/USD currency pair accounts for about 8% of the trading volume in the foreign exchange markets. This currency pair is extremely sensitive to news about the US dollar. It is also important to note that this pair has a positive correlation with the EUR/USD pair. When the EUR/USD pair moves 5% in a certain direction, the GBP/USD pair moves 8% in the same direction. At the same time, there is a negative correlation between the GBP/USD pair and the USD/CHF pair.

USD/CAD
The Canadian dollar is known in the world of currency trading as the Loonie, which is the name of the Canadian one-dollar coin that features an image of a bird, the Loon, that is widely distributed in Canada. The Canadian dollar is closely linked to the U.S. dollar because the economies of the two countries are very closely linked as neighbours. 85% of Canada’s exports go to the U.S., while Canada imports about 50% of its goods and services from the U.S. Canada’s most important exports include oil and lumber, with the price of oil being one of the most important factors influencing the value of the Canadian dollar.