Being one of the world's most liquid markets is the reason why forex trading is so popular. The average amount transacted in the foreign exchange market each day is $5 trillion USD. Over US$80 billion (about R120 billion) is traded in South Africa every day.
To lower the dangers associated with forex trading, South Africa has a number of trading laws and regulations. These guidelines are enforced by the South African Financial Sector Conduct Authority (FSCA).
All financial activity in the nation is supervised by the FSCA. All forex brokers can communicate on the market without any issues thanks to the FSCA.
This article explores the most traded currency pairs by South African traders, highlighting the most popular forex pairs, market trends, and key insights to help traders make informed decisions.
What is Currency Trading?
The process of purchasing and selling currencies on the foreign exchange market is known as currency trading, or forex or foreign exchange trading. Traders speculate on the value of one currency in relation to another in this dynamic global market. Because of its accessibility and potential for profit, forex trading is a popular investment option.
When you buy or sell one currency, you instantly buy or sell another, which leads to the exchange of currencies in pairs. A base currency and a quote currency are present in every currency pair; the base currency is displayed first, followed by the quote currency.
A currency pair's price indicates how much of the quote currency you will need to purchase one unit of the base currency.
For instance, the base currency in the EUR/USD exchange rate is EUR, while the quote currency is USD. One euro is equivalent to 1.20 US dollars if the quote price was 1.2000.
Two currencies make up a currency pair; the base currency is the first one, and the quote currency is the second. The relative cost of the base currency to the quoted one is shown by the exchange rate. Successful Forex trading requires an understanding of currency pairs.
Let’s have a look at the most traded currency pairs by South Africans.
EUR/USD
With EUR/USD transactions accounting for 24.0% of all daily forex trading, it is the most traded currency pair on the market. Because it accurately reflects the two largest economies in the world—the US and the European single market—the EUR/USD pair is quite popular.
The pair has a lot of liquidity due to the significant daily volume of EUR/USD transactions, which typically leads to tight spreads. Because they allow for huge deals with minimal market impact, liquidity and tight spreads are alluring to traders.
The interest rates set by the US Federal Reserve (Fed) and the European Central Bank (ECB) are two of the many factors that affect the EUR/USD exchange rate. Because higher interest rates provide a better return on an initial investment, demand for the currency with the higher interest rates will rise. The euro would probably have increased in value in relation to the dollar if the ECB had, for example, set higher interest rates than the Fed.
USD/JPY
The USD/JPY currency pair, also known as "the gopher," consists of the US dollar and the Japanese yen. With 13.2% of all daily forex transactions, it is the second most traded pair on the market.
Because the US dollar is the most widely traded currency worldwide and the yen is the most traded currency in Asia, USD/JPY, like EUR/USD, is renowned for having excellent liquidity.
The Bank of Japan (BoJ) sets interest rates for the Japanese economy, which influences the value of the yen in relation to the US dollar, much like the Fed and the ECB do.
GBP/USD
A "cable" is a slang term for the British dollar/US dollar exchange rate because of the deep-sea cables that once carried the bid and ask prices from London to New York. The British dollar/US dollar pair is 9.6 percent of all currency transactions each day.
Just like with most other currency pairs, the strength of the British and American economies determines the value of the GBP/USD. The pound's strength versus the dollar is generally associated with greater economic growth in the UK than in the US. The inverse is true, though, if the American economy is outperforming the British one.
Interest rate decisions made by the Federal Reserve and the Bank of England (BoE) have an impact on the quote price of the British pound/US dollar, as they do on the first two most popular currency pairs here. The GBP/USD currency pair's value is highly sensitive to the ensuing gap between the two currencies' interest rates.
AUD/USD
The Australian dollar is represented by the symbol AUD/USD, which is commonly abbreviated as the "Aussie" and is compared to the US dollar. It accounted for 5.4% of all currency trades in the most recent triennial survey. A significant amount of Australia's GDP comes from metal and resource exports like coal and iron ore, which in turn affect the value of the Australian dollar.
If the global market value of these goods fell, the Australian dollar would probably fall as well. For the Australian dollar/United States dollar exchange rate, this would indicate that the US dollar would strengthen, resulting in a lower cost of US dollars per Australian dollar.
Just like the other currency pairs discussed before, the AUD/USD exchange rate is influenced by the difference in interest rates between the US Federal Reserve and the Reserve Bank of Australia (RBA). It would cost more US dollars to purchase one Australian dollar, for instance, if US interest rates were low, which would likely cause the USD to decline versus AUD.
USD/CAD
Because of the loon bird that appears on Canadian dollar coins, the combination of the US dollar and the Canadian dollar is popularly referred to as the "loonie" (USD/CAD). Since oil is Canada's primary export, its value is directly related to that of the currency.
Oil is traded on global markets in US dollars; hence, Canada has the opportunity to earn a substantial amount of US dollars from its oil exports. The Canadian dollar is expected to gain value relative to the US dollar if the price of oil increases.
Generally, an increase in oil prices leads to a decrease in the value of the US dollar. This is because converting more foreign currency into US dollars to purchase the same quantity of oil weakens the dollar. Because of the strong correlation between the two, a rise in oil prices is likely to have a positive effect on the value of the Canadian dollar.
Because of the correlation between oil market volatility and the USD/CAD exchange rate, USD/CAD traders should monitor the price of Brent crude as well as US crude.
USD/CNY
The United States dollar and the Chinese yuan, or renminbi, form a currency pair called USD/CNY. In 2019, 4.1% of all FX trades involved this pair.
As an example, China's trade surplus in 2015 was $304 billion, which is considered very good. This fell to over $25 billion in 2018, following the trade conflict. As a consequence, the renminbi lost a lot of ground compared to the dollar.
The yuan actually gained ground against the dollar in 2020, despite a brief depreciation in early 2020 due to the spread of word about the impending COVID-19 pandemic. Actually, in 2020, China's GDP increased by 2.3%.
USD/CHF
Commonly referred to as the "Swissie," the USD/CHF currency pair consists of the US dollar and the Swiss franc. Because of Switzerland's longstanding reputation as a financial safe haven, the USD/CHF pair is quite popular.
Traders generally seek refuge in CHF when market volatility is high, but they tend to show less interest in the Swiss franc when market stability is high. As the CHF strengthens versus the USD due to increasing investment, the price of this pair is expected to fall during periods of increased volatility.
The Swiss franc is not as frequently traded as the six currency pairs that came before it because people mostly use it when the economy is unstable or when they want a safe haven. Still, 3.6% of all foreign exchange transactions per day in the triennial survey involved USD/CHF.
USD/HKD
The Hong Kong dollar is pegged to the US dollar via the USD/HKD exchange rate. From 2016 to 2019, the trading volume of this pair increased from 1.5% of all daily forex transactions to 3.3%, a more than 100% increase.
A linked exchange rate, an unusual arrangement, ties the value of the Hong Kong dollar to that of the US dollar. Traders can profit from price fluctuations within the authorized band of the Hong Kong dollar, which is HK$7.75 to HK$7.85 to US$1. Despite the pandemic's impact on currency volatility, the pair showed unusual stability in 2020 and early 2021, as indicated by the narrow band.
EUR/GBP
One of the most notoriously tricky currency pairs to accurately forecast is the EUR/GBP pairing, which involves the Euro and the British pound. The historical connection between the EUR and GBP can be attributed to the closeness of the UK to Europe and the consequent robust trading relations between the two economies.
We nonetheless counted 2.0% of daily trades involving the EUR/GBP pair, making it a popularly traded currency pair, despite the purported difficulty in forecasting its moves.
Just as with the other currency pairs here, traders should be on the lookout for pronouncements from the ECB and the BoE that might influence the euro and pound exchange rates, leading to even more volatility.
The price of this currency pair has been very volatile in the past few years, mostly as a result of the uncertainty around Brexit and the subsequent epidemic. Although traders may find the high volatility appealing, they should be prepared to limit their risk before entering a volatile market.
USD/KRW
You can think of USD/KRW as the US dollar vs. the won of South Korea. In 2019, the first year that USD/KRW was included in a list of the top ten most traded currencies, this forex pair accounted for 1.9% of daily forex transactions.
As of August 2021, the South Korean economy ranked tenth in the world according to nominal GDP, having developed to become the fourth biggest in Asia over the first ten years of the new century. The surge in USD/KRW activity may be attributable to traders and speculators looking to gain exposure to a key Asian market other than Japan, China, and Hong Kong.
South Korea's phenomenal economic growth, particularly after the Korean War ended in 1953, has earned the nickname "the Miracle on the Han River" among outside observers. Many market participants are excited about South Korea and its currency because of its membership in the United Nations, the OECD, and the G20, as well as its current growth, which is being capitalized on
Conclusion
While the EUR/USD remains the most traded forex pair, there are several other highly liquid options to consider. Before choosing a currency pair, it’s crucial to evaluate factors such as interest rate differentials, political events, and commodity prices. Conducting both technical and fundamental analyses will help determine whether a pair is a viable trading option at any given time.
Additionally, while volatility can create opportunities, it also increases the risk of loss. Always ensure that you can manage and afford the risks involved, and implement effective risk management strategies before opening a position.
