Foreign exchange (Forex) is the biggest and most unpredictable market on the planet, with hundreds of possible currency combinations. The massive and robust American economy has made the dollar the most widely used currency in the world. Even though there are a lot of official currencies in circulation, the foreign exchange market only deals in a small number of them. Currency trading only involves the most liquid and economically and politically stable currencies.
What Are Currency Pairs?
In the forex market, two countries' currencies are paired to trade with each other. There will be exchange rates for both currencies that the trade will be based on. Buying, selling, and trading in the foreign exchange market will all occur through currency pairs.
Let’s look at the top 10 most trade currency pairs.
USD/EUR
Surveys found that 24.0% of all daily forex trades involve the USA/EUR currency combination, making it the most traded currency pair overall. The fact that it stands for the world's two largest economies—the United States and the European single market—is what makes the USA/EUR pair so popular.
Spreads tend to be small for the USA/EUR pair because of the large number of transactions that occur every day. The ability to make huge deals with minimal effect on the market is what draws traders to markets with high liquidity and narrow spreads.
Among the many variables that influence the USA/EUR exchange rate are the interest rates established by the US Federal Reserve and the European Central Bank. Higher interest rates provide a better return on an initial investment, which is why the currency with higher rates will see a boost in demand.
USD/JPY
The United States dollar and the Japanese yen are the basis of the USD/JPY currency pair, or "the gopher" in other names. With a daily volume of 13.2%, it is the second most actively traded currency pair in the market.
The high liquidity of the USD/JPY pair is a result, like that of the USA/EUR pair, of the yen's status as the most traded currency in Asia and the dollar's status as the most traded currency globally.
Like the Federal Reserve and the European Central Bank, the Bank of Japan (BoJ) influences the value of the yen compared to the US dollar by determining interest rates for the Japanese economy.
USD/GBP
'Cable' is a colloquial term for the British dollar/US dollar exchange rate because of the deep-sea cables that used to transmit 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, according to the BIS survey.
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.
The quote price of GBP/USD is influenced by the interest rates set by the Bank of England (BoE) and the Federal Reserve, just like the first two most popular currency pairs on this list. The future interest rate disparity between the US dollar and the British pound can significantly impact the value of the GBP/USD currency pair.
USD/CHF
Commonly referred to as the "Swissie," the USD/CHF currency pair consists of the US dollar and the Swiss franc. The Swiss banking system has long served as a refuge for investors' money, which contributes to the USD/CHF pair's popularity.
Consequently, CHF is a popular choice for traders when market volatility is high, but it tends to lose popularity when markets are stable. 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 haven. The triennial survey did find that 3.6% of all forex transactions per day involved USD/CHF.
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). The percentage of daily currency trading involving USD/CAD was 4.4%, according to the BIS survey. Being Canada's primary export, the value of the currency is highly dependent on oil prices.
Oil is traded on global markets in US dollars; hence Canada can earn a substantial number of US dollars from its oil exports. Therefore, a stronger US currency is likely to cause the Canadian dollar to gain value relative to its US counterpart if oil prices rise.
A weaker dollar makes it necessary to convert more US dollars into other currencies to purchase the same amount of oil as before, which is why the dollar tends to weaken when oil prices rise. Given the strong correlation between oil prices and the Canadian dollar, rising oil prices should lead to a stronger currency.
Therefore, while trading USD/CAD, traders should monitor the price of Brent crude and US crude. Any changes in the oil market would most certainly affect this currency pair.
USA/AUD
AUD/USD, sometimes referred to as the ‘Aussie’, represents the Australian dollar against the US dollar. It made up 5.4% of daily forex trades in the latest triennial survey. The value of the Australian dollar is tied closely to the value of its exports, with metal and mineral exports such as iron ore and coal accounting for a large proportion of the country’s gross domestic product (GDP).
A slump in the value of these commodities on the world market would likely cause a reciprocal slump in the value of the Australian dollar. In the case of the AUD/USD currency pair, this means the US dollar would become stronger, so it would cost fewer US dollars to buy one Australian dollar.
Like the previously mentioned currency pairs, the AUD/USD exchange rate is also affected by the interest rate differential between the Reserve Bank of Australia (RBA) and the US Federal Reserve. For example, if American interest rates are low, USD would probably weaken against AUD, and it would cost more US dollars to buy one Australian dollar.
USD/CNY
A partnership between the US dollar and the Chinese renminbi, or yuan, is the USD/CNY currency pair. In 2019, the pair was involved in 4.1% of all FX trading.
The conventional wisdom holds that China's trade surplus is too large; in 2015, for instance, it was $304 billion. Following the trade dispute in 2018, this fell to around $25 billion. Therefore, the renminbi lost a lot of ground compared to the dollar.
Despite a brief dip in value in early 2020 as fears of a COVID-19 pandemic spread, the yuan ended the year up against the dollar. There was a 2.3% increase in China's GDP in 2020.
USD/HKD
The USD/HKD matches the US dollar vs the Hong Kong dollar. 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.
The protests in Hong Kong, which took centre stage in 2019, may have contributed to the increase. The Fugitive Offenders amendment bill's attempted adoption and claims of police brutality in Hong Kong also contributed to the protests.
It is probable that the protests, which started around a month before the data was gathered, affected the trading volume of USD/HKD.
In an unusual arrangement called a linked exchange rate, the value of the Hong Kong dollar is tied to that of the US dollar. Investors can profit from price fluctuations in the Hong Kong dollar if they stay within the permitted range of HK$7.75 to HK$7.85 to US$1. In 2020 and early 2021, when the pandemic caused other currencies to experience high volatility, the pair exhibited an unusually stable performance, as indicated by the narrow band.
EUR/GBP
Many consider the Euro/Great Britain Pound pair to be among the most challenging for accurate price forecasting. 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 the ninth most traded currency pair overall, despite the purported difficulty in forecasting its moves.
Traders should remain vigilant for any pronouncements made by the ECB or the BoE that may impact the exchange rates of the euro and the pound, as this might lead to even more volatility in the market.
Due mostly to the uncertainties around Brexit and subsequently the epidemic, the price of this currency pair has swung rather erratically in recent years. While traders may be enticed by the high volatility, it is crucial to have a risk management strategy prior to entering a volatile market.
USD/KRW
Tenth on the list is the US dollar/Korean won combination, which pits the US currency against the won of South Korea. For the first time ever, the US dollar/Korean won currency combination was among the 10 most traded in 2019, accounting for 1.9% of all FX 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.
Traders and speculators may be looking for exposure to a different important Asian market than Japan, China, and Hong Kong, which could explain the heightened activity that USD/KRW has seen.
People frequently call the remarkable economic progress in South Korea, which began after the Korean War ended in 1953, the Miracle on the Han River. Now that this growth is being capitalised on, South Korea is a member of the G20, the OECD, and the UN, which makes the country and its currency an attractive prospect for many market players.
Conclusion
The EUR/USD remains the most traded forex pair, offering high liquidity and significant trading opportunities. However, several other currency pairs with strong liquidity are worth exploring.
When selecting a pair to trade, it’s essential to consider factors such as interest rate differentials, political developments, and commodity price trends. Conducting thorough technical and fundamental analyses is crucial to determine if a pair is a viable option at any given time.
While volatility can create opportunities, it also increases the potential for loss. Always trade within your risk tolerance and implement effective risk management strategies to navigate the market responsibly.
