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Six Most Popular Currencies for Trading
Forex is the largest and most liquid market, with trillions of dollars traded between millions of parties around the globe each day. One of the first steps in understanding the market—which is also known as foreign exchange or currency trading—is to gain familiarity with some of the more commonly traded currencies. Here is a look at six major currencies, as well as the underlying traits and characteristics of each one.
4 Of The Most Popular Traded Currencies
1. The U.S. Dollar
The U.S. dollar, which is sometimes called the greenback, is first and foremost in the world of forex trading, as it is easily the most traded currency on the planet. The U.S. dollar can be found in a currency pair with all of the other major currencies and often acts as the intermediary in triangular currency transactions. This is because the greenback acts as the unofficial global reserve currency, held by nearly every central bank and institutional investment entity in the world.
In addition, due to the U.S. dollar’s global acceptance, it is used by some countries as an official currency, in lieu of a local currency, a practice known as dollarization. The U.S. dollar also may be widely accepted in other nations, acting as an informal alternative form of payment, while those nations maintain their official local currency.
- Forex trading is the world’s largest and most liquid market.
- The U.S. dollar, the euro, Japanese yen, Swiss franc, Canadian dollar, and British pound are actively traded currencies.
- The U.S. dollar is one side of many popular currency pairs and is also a reserve currency, making it first and foremost in the world of currency trading.
- Economic trends in the U.K. are often captured by movements in the British pound, while the euro is the currency of the eurozone.
- The Japanese yen is the most active of the Asian currencies, due partly to the popularity of the carry trade.
The U.S. dollar is also an important factor in the foreign exchange rate market for other currencies, where it may act as a benchmark or target rate for countries that choose to fix or peg their currencies to the dollar’s value. China, for instance, has long had its currency, the yuan or renminbi, pegged to the dollar, much to the disagreement of many economists and central bankers. Quite often, countries will fix their currencies to the U.S. dollar to stabilize their exchange rates rather than allowing the free (forex) markets to drive the currency’s relative value.
One other feature of the U.S. dollar is that it is used as the standard currency for most commodities, such as crude oil and precious metals. Thus, these commodities are subject not only to fluctuations in value due to the basic economic principals of supply and demand but also to the relative value of the U.S. dollar, with prices highly sensitive to inflation and U.S. interest rates, which can affect the dollar’s value.
2. The Euro
The euro has become the second most traded currency behind the U.S. dollar. The official currency of the majority of the nations within the eurozone, the euro was introduced to the world markets on Jan. 1, 1999, with banknotes and coinage entering circulation three years later.
Along with being the official currency for most eurozone countries, many nations within Europe and Africa peg their currencies to the euro, for much the same reason that currencies are pegged to the U.S. dollar—to stabilize the exchange rate. As a result, the euro is also the world’s second-largest reserve currency.
With the euro being a widely used and trusted currency, it is prevalent in the forex market and adds liquidity to any currency pair it trades with. The euro is commonly traded by speculators as a play on the general health of the eurozone and its member nations. Political events within the eurozone can also lead to large trading volumes in the euro, especially in relation to nations that saw their local interest rates fall dramatically at the time of the euro’s inception, notably Italy, Greece, Spain, and Portugal. The euro may be the most “politicized” currency actively traded in the forex market.
3. The Japanese Yen
The Japanese yen is easily the most traded of Asian currencies and viewed by many as a proxy for the underlying strength of Japan’s manufacturing and export-driven economy. As Japan’s economy goes, so goes the yen (in some respects). Forex traders also watch the yen to gauge the overall health of the Pan-Pacific region as well, taking economies such as South Korea, Singapore, and Thailand into consideration, as those currencies are traded far less in the global forex markets.
The yen is also well known in forex circles for its role in the carry trade (seeking to profit from the difference in interest rates between two currencies). The strategy involves borrowing the yen at next to no cost (due to low-interest rates) and using the borrowed money to invest in other higher-yielding currencies around the world, pocketing the rate differentials in the process.
With the carry trade being such a large part of the yen’s presence on the international stage, the constant borrowing of the Japanese currency has made appreciation a difficult task. Though the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially with the more heavily traded currencies such as the U.S. dollar and the euro, is a large determinant of the yen’s value.
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4. The Great British Pound
The Great British pound, also known as the pound sterling, is the fourth most traded currency in the forex market. Although the U.K. was an official member of the European Union, the country never adopted the euro as its official currency for a variety of reasons, namely historic pride in the pound and maintaining control of domestic interest rates. As a result, the pound is sometimes viewed as a pure play on the United Kingdom.
Forex traders will often estimate the value of the British pound based on the overall strength of the British economy and political stability of its government. Due to its high value relative to its peers, the pound is also an important currency benchmark for many nations and represents a very liquid component in the forex market. The British pound also acts as a large reserve currency due to its historically high relative value compared to other global currencies.
5. The Canadian Dollar
Also known as the loonie, the Canadian dollar is probably the world’s foremost commodity currency, meaning that it often moves in step with the commodities markets—notably crude oil, precious metals, and minerals. With Canada being such a large exporter of such commodities, the loonie often reacts to movements in underlying commodities prices, especially that of crude oil. Traders often trade the Canadian dollar to speculate on the movements of commodities or to hedge positions in the commodities market.
Being located in close proximity to the world’s largest consumer base—the United States—the Canadian economy and the Canadian dollar are highly correlated to the U.S. economy and movements in the U.S. dollar as well.
6. The Swiss Franc
Last is the Swiss franc, which, much like Switzerland, is viewed by many as a “neutral” currency. More accurately, the Swiss franc is considered a safe haven within the forex market, primarily due to the fact that the franc tends to move differently than more volatile commodity currencies, such as the Canadian and Australian dollars. The Swiss National Bank has actually been known to be quite active in the forex market to ensure that the franc trades within a relatively tight range, to reduce volatility, and to keep interest rates in check.
What Are the Most Commonly Traded Currency Pairs?
There are many official currencies that are used all over the world, but there are only a handful of currencies that are traded actively in the forex market. In currency trading, only the most economically/politically stable and liquid currencies are demanded in sufficient quantities. For example, due to the size and strength of the United States economy, the American dollar is the world’s most actively traded currency.
- Forex markets are used to trade exchange rates between two or more national currencies.
- All trading within the forex market, whether selling, buying, or trading, will take place through currency pairs.
- The most common currency pairs often involve the US dollar or Euro, but may also show up among geographic neighbors like Australia and New Zealand.
What are Currency Pairs
Currency pairs are the national currencies from two countries coupled for trading on the foreign exchange (FX) marketplace. Both currencies will have exchange rates on which the trade will have its position basis. All trading within the forex market, whether selling, buying, or trading, will take place through currency pairs.
In general, the eight most traded currencies (in no specific order) are the U.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD) and the Japanese yen (JPY).
Nearly any nation’s currency may trade, but some currencies pair more frequently than other money. All of the primary currency pairs contain the USD. There are many major currency pairs within the forex market around the world. As an example, some of the most common currency pairs outside of the Eurodollar are:
- USD/JPY. This currency pair sets the US dollar against the Japanese Yen.
- USD/GBP. This currency pair sets the US dollar against the United Kingdom pound and is commonly referred to as the pound-dollar.
- USD/CHF. This currency pair sets the US dollar against the Switzerland currency. It is referred to as the dollar swissy.
- USD/CAD. This currency pair sets the US dollar against the Canadian dollar. It is referred to as the dollar-loonie.
- AUD/USD. This currency pair sets the US dollar against the Australian dollar and is referred to as the Aussie dollar.
- NZD/USD. This currency pair sets the currency of New Zealand against the US dollar, and it is referred to as the kiwi dollar.
There are also currency pairs that do not trade against the US dollar, which have the name cross-currency pairs. Common cross currency pairs involve the euro and the Japanese yen.
The Most Commonly Traded Currency Pairs in the Forex Market by Volume
Currencies must be traded in pairs. Mathematically, there are 27 different currency pairs that can be derived from just eight currencies alone. However, there are about 18 currency pairs that are conventionally quoted by forex market makers as a result of their overall liquidity. These pairs are:
The total amount of currency trading involving these 18 pairs represents the majority of the trading volume in the FX market. This manageable number of choices makes trading a lot less complicated compared to dealing with equities, which has thousands of possible choices to choose from.
5. Popular Traded Currencies
The Forex market is one of the biggest and most liquid in the world, with a total daily average trading volume of USD 5.1 trillion in April 2020, according to the Bank For International Settlements ( BIS ).
Most of this trading activity is concentrated within 5 countries:
- United Kingdom
- United States
- Hong Kong SAR
These sale desks intermediated 77% of all currency trading in April 2020, according to BIS statistics.
Since 1986, the BIS monitors all Forex market activity every three years to spot any changes in global financial markets, in order to know how currencies in the world are traded.
Some of these factors include:
- International trades, trading volumes
- Exchange rates
- Widely traded currency pairs, etc.
When traders invest in the Foreign Exchange market, it’s mainly because they want to take advantage of frequently traded Forex pairs with a large average daily price, allowing them to make big profits.
The chart below is from the Triennial Central Bank Survey of the BIS, which represents the daily averages in April 2020 of the Forex Exchange market turnover by currency pairs between 2020 and 2020, net-net basis, in percent.
Market turnover by currency pairs between 2020 and 2020
The most traded currency in the world
There are several reasons why the American Dollar is the most traded currency in the world.
Going back in history, the USD became the world’s reserve currency with the Bretton Woods Agreement in 1944, when all foreign currencies were pegged to it.
At that time, the USD was the only currency convertible in Gold, which makes it the standard unit of currency in the international commodity market today, especially with Gold and Oil.
It’s a trustworthy, stable, and reliable currency, which makes it the most used in international transactions. The American Dollar is widely accepted throughout the world as a medium of exchange, and a means of payment, in many countries.
As an example of the American Dollar’s supremacy, a few nations besides the U.S. use the U.S. Dollar as their official currency, such as El Salvador, Panama and Ecuador. This is a process called dollarization.
The second largest reserve currency
The Euro is the 2 nd most traded currency, and the 2 nd largest reserve currency.
While it was introduced on January 1 st , 1999 to 11 countries, it is now the official currency of 19 countries within the European Union.
Not all EU member states have the Euro as their main currency, but over 337 million EU citizens now use Euro coins and notes.
In addition, more than 20 countries outside the Eurozone have pegged their currencies to the Euro in order to stabilise their exchange rates, such as Bulgaria, Bosnia, and about 15 African countries.
The Yen is viewed as a safe haven
The Yen, the official currency of Japan, is the 3 rd most traded currency in the foreign exchange market.
It’s also the most liquid currency in Asia, and the 4 th most important reserve currency in the world (after the U.S. Dollar, the Euro, and the Pound Sterling), especially for Asian countries.
Even though the country has very high debt levels and doesn’t have a high growth economy, Japan seems to provide more stability than the majority of the other world economies.
For this reason, traders are confident in its economy, and the Yen is seen as a safe haven in times of high volatility and uncertainty.
The Yen carry trade is among the most well known and popular currency carry trade strategies among investors – this is where traders will borrow Yen because of the low interest rate in order to buy currencies with higher interest rates, making profits on the difference.
Remember the basics of currency trading.
When you invest in the Forex market, you buy or sell currency pairs – not currencies.
To know at which price you can do so, just have a look at FX quotes, which represent the buying (ask) and selling (bid) prices depending on your scenario:
- If you think that the AUD/USD is going up, you would go long (buy the currency pair),
- If you think that the GBP/JPY is going down, you would go short (short-sell the currency pair).
In the above examples, the Australian Dollar (AUD) and the British Pound (GBP) are called the base currency, while the American Dollar (USD) and the Japanese Yen (JPY) represent the quote currency.
There are different sorts of currency pairs you can trade with different kinds of trading conditions associated.
These currency pairs are the most traded. They all have the American Dollar either as a base currency, or a quote currency.
You will usually have the best trading conditions with these pairs: tighter spreads, lower margin requirements, higher leverage, etc.
- EUR/USD Euro/U.S. Dollar
- USD/JPY U.S. Dollar/Japanese Yen
- GBP/USD Sterling/U.S. Dollar
- USD/CHF U.S. Dollar/Swiss Franc
- U.S. Dollar/Canadian Dollar
Minors are also called cross currency pairs. These represent less traded pairs.
They usually do not have the U.S. Dollar on either side, but they do contain one of the major currencies.
- EUR/GBP Euro/Sterling
- GBP/CAD British Pound/Canadian Dollar
- NZD/JPY New Zealand Dollar/Japanese Yen
- EUR/AUD Euro/Australian Dollar
- GBP/JPY British Pound/Japanese Yen
Exotic currency pairs usually have one major currency against a currency from a developing, or smaller, economy. Because these currency pairs aren’t found as often as the others they aren’t exactly most liquid currency pairs.
They can be among the most volatile currency pairs and trading these can be more expensive, with a wider spread than more conventional pairs.
- JPY/NOK Japanese Yen/Norwegian Krone
- GBP/ZAR Sterling/South African Rand
- AUD/MXN Australian Dollar/Mexican Peso
- EUR/TRY Euro/Turkish Lira
- USD/THB U.S. Dollar /Thailand Baht
The most popular currency pairs between April 2020 and April 2020 were the USD/EUR, representing 23% of all transactions, followed by the USD/JPY, and the USD GPB, which represented 17.7%, and 9.2% of the transaction respectively.
As you can see from the first image in this article, the USD is the world’s most important vehicle currency. The BIS reported that it was on one side of 88% of all trades during the period.
The EUR and the JPY lost market share against the USD, while many currencies from emerging markets increased their share.
In April 2020, the Chinese Renminbi (RMB) became the 8 th most traded currency, and overtook the Mexican Peso as the 1 st most traded emerging market currency.
To maximise chances of earning the biggest profits, Forex traders often develop trading strategies around highly liquid, top traded currency pairs.
One short-term Forex trading strategy that is often used is called “news trading” or fundamental analysis, whereby one trades according to news events.
Trading around high-impact events consists of investing on the highest volume currency pairs – as they will usually be the most profitable currency pairs to trade.
This means that traders will invest money during the release of economic data or other news, or during important speeches, or conference press, such as when a central bank decides whether to increase or decrease its interest rates.
It’s one of the most aggressive and active fundamental strategies, and it’s also a high-risk, as the trading volume, and the associated volatility, are larger than under “normal” trading circumstances.
To use this strategy, most traders need to be aware of the economic calendar.
This all depends on the type of trader you are.
For the short term
For instance, a short-term trader will focus on the most traded currency pairs with the best bid/ask spread possible to make quick profits thanks to higher volatility.
For the long term
On the other hand, a longer-term position trader will not necessarily look for the most liquid or volatile currency pairs.
Same goes for those who make currency carry trades.
This method focuses on the rate differential between the 2 currencies in the aim of making profits based on said difference, as opposed to trying to get the best entry and exit points possible.
Also, remember that there is a certain degree of correlation between currencies, and consequently between currency pairs.
If you invest on the EUR/GBP, and the EUR/CHF, both currencies are positively correlated – which means that they tend to evolve in the same direction.
Because they both have the EUR as a base currency, if the EUR weakens against its major counterparts, then both currency pairs will lose ground, and your portfolio will take a hit.
For this reason, be sure to diversify your FX portfolio by taking into consideration currency correlations.
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