Many people prefer to invest in the foreign market through currencies rather than cryptocurrencies. One might ask themselves, why are cryptocurrencies down. There are many reasons for these and they include:
- The market volatility is increasing as the days go by.
- The SEC is regulating it in a slow manner
- Cryptocurrency is viewed as a short term investment
Trading in the foreign market involves exchanging different currencies with each other. When quoting currencies the base currency is the one which will first appear while the latter is the quote currency. The price of a currency pair is basically the amount of money you would need to buy a single unit of the base currency. Trading in the foreign market usually involves currency pairs.
For a currency to be traded actively, it has to be from a politically and economically stable state or union. This is because; currencies from economically and politically stable countries or unions tend to be highly liquid.
Main types of currency pairs
Cross-currency pairs are any currency pairs that don’t include the U.S Dollar. The USD isn’t used in settling the involved trade contract. The most-traded cross currencies pairs are the EUR JPY and EUR GBP. These pairs tend to be cheaper and it is quite easy to make payments that are international in nature. The spread of a transaction that involves this type of pair is quite tight as has been crossed.
Major currency pairs: these are basically currency pairs that are mostly traded in the foreign market. As opinions differ, there are actually currency pairs which are universally preferred by traders.
Commodity currency pairs: these are the types of currency pairs that are mostly linked to commodities like iron ore and oil. The currency pair includes the Australian dollar with the USD and the USD with the Canadian Dollar (CAD).
Factors affecting the rates of the currency pairs
- Interest rates. The central banks of the individual economies influence the rates by changing the rates of interest of their economies’. If they increase it, the demand for their currencies will increase as investors want currencies that are appreciating
- The political climate. Negative happenings in a particular country will greatly cause a depreciation of the value of their currency.
- The market volatility. Most investors tend to prefer a bigger position for a less volatile currency while smaller positions for a highly volatile currency.
- Economic data. Inflation, employment rate, GDP and retails sales give the investors a clear headway of how the economy of a particular nation is fairing on.
Below is a list of currency pairs that are mostly traded
1. EUR USD
In the year 2019, this pair commanded 24% of the daily transactions in the foreign market. This might be due to the fact they are used by the two largest economies: the European Union and the United States. It is commonly known as fiber. Their high liquidity is brought about by their large trade volumes. Liquidity is the ability of a particular pair to be either sold or purchased on demand. Having great liquidity actually acts as an investor magnet as it means that they can make large forex transactions without any impact or great variances in the forex market.
2. USD JPY
This pair is usually known as the gopher and it has been found out that in 2019 it commanded 13% of the forex. It is formed by the Japanese yen and the US dollar. The pair has a high level of liquidity due to the fact that the yen is the currency in Asia that is most traded while the US dollar is the most traded currency in the whole world. The bank of japan can be said to affect the yen value in comparison with the US dollar as it determines the rate of interest of the yen.
3. GBP USD
This pair is also known as the cable and it is formed by the sterling pound and the US dollar. In the year 2019, it commanded 9.6% of the transaction in the foreign market trade. The strength of this pair can be attributed to their nations’ large economies. It all depends on the economies of America and Britain. If the American economy grows faster than that of Britain then the dollar will be stronger than the pound while if the Britain economy grows faster than that of Britain the sterling pound will be stronger than the US dollar.
4. AUD USD
The Aussie, the above currency pair, is formed by the AUD and the US dollar. It commanded 5.4% of the foreign market in 2019. The pair is actually a commodity currency pair as it is directly related to the value of the exports of Australia. The exports include coal and iron ore. If the value of the aforementioned commodities drops then the value of the AUD will reduce. For instance, if the inters rate set up by the US Federal Reserve is low then the value of the AUD will be weakened.
5. USD CAD
This pair is also known as the loonie. In 2019 it was found that this pair took for 4.4% of the forex transactions. Since Canada’s chief export is oil, then one can conclude that the value of the CAD is determined by the price of oil. As the world prices oil in US dollars, Canada earns a lot of US dollars through its export of oil. Hence, if the oil price increases then the CAD will be strengthened more than the US dollar. The US dollar tends to weaken when the oil prices while the Canadian dollar will be strengthened.
6. USD CHF
The Swiss are formed by the US dollar and the Swiss franc. This pair is on the list due to the great financial system, great economic growth, and political stability of Switzerland. Many foreign traders exchange their currencies to the Swiss franc, as the CHF is a safe haven. During times of increased market volatility, the Swiss franc is the go to currency. When there is great market stability many investors ‘ignore’ it. During the said times of market instability, the price of the pair drops as the USD will be weakened while the CHF will be strengthened. This pair isn’t actively traded most of the time, only when there is increased market volatility will people trade it.in the previous year, this pair commanded of 3.6% of the daily forex trades.
The percentage of the daily transaction of this pair increased to 3.3% due to the fact that most traders shifted their focus on the Hong Kong dollar during the protests led by Hong Kong citizens against police brutality. This pair is quite different from the rest of the currency pairs due to the linked exchange rate which determines the value of the Hong Kong dollar in relation to the US dollar.
8. EUR GRP
It is quite hard to predict the price of this pair as both the UK and Europe have a strong trade and historical link. Notwithstanding, the UK and Europe relationship, this pair was able to take 2% of the daily transactions in the foreign market. The volatility brought about by the Brexit saga has led to the reduction of the pair’s price. Hence its exchange rate has reduced.
9. NZD USD
This currency pair is formed by the New Zealand dollar (kiwi dollar) and the USD.
Which currency pair has the largest trading volume?
Currencies have to be traded in pairs. The currency pair which has a great volume in trade is USD EUR.
What are the major currencies in the foreign market?
There are eight most traded currencies in the world and these are;
- The Yen of Japan
- The US dollar
- The CAD
- The Euro
- The great British pound( sterling)
- The Swiss franc
- The new Zealand dollar
- The AUD
Which three currency pairs are the highest traded?
The currency pairs which are mostly traded are the Euro Dollar (EUR USD), Dollar Yen, and the pound dollar.