Forex can be defined as a network of buyers and sellers, who give and take currencies to each other at an agreed price. It is the way by which individuals, companies, and central banks convert one currency into another.
A part of foreign exchange is done for practical purposes; Forex traders undertake the majority of the currency transactions to make profits out of them. The volatility of a currency depends on the amount of this currency converted in other currencies. It is this volatility that makes FX such an attractive and appealing market for traders: bringing a great chance to make profits in a short time.
Major currency pairs
The state of the global economy is dependent on the highs and lows of a different country- certain currencies. In the Forex market, a currency pair is a quotation of the relative value of one currency in terms of another currency. The currency which is used as the reference is called “quote currency,” while the other one, always on the left of the pair is called “base currency.”
For example, if we take into consideration the EUR/USD (euro versus US dollar) pair. As we explained before, EUR is the base currency, while USD is the quote. If the rate of EUR/ USD is 1.2100, this means €1 is equivalent to US$1.2100. Here is a list of major pairs:
The British Pound Sterling/US Dollar (GBP/USD), Trading this pair is often referred to as trading the “Cable.”
The US Dollar/Swiss Franc (USD/CHF), Popularly known as the “Swissie,” the pair is profoundly impacted by the interest rate differential between the US Federal Reserve and the Swiss National Bank.
The Australian Dollar/US Dollar (AUD/USD), The “Aussie,” as this pair is called, is a popular commodity pair. The Australian economy thrives on commodities trading, being a huge exporter of coal and iron ore.
The US Dollar/Canadian Dollar (USD/CAD), Another popular commodity pair is the “Loonie.” Canada is also an economy dependent on commodity prices. It has huge reserves of timber, natural gas, and oil.
The New Zealand Dollar/US Dollar (NZD/USD), Named after the popular fruit indigenous to New Zealand, the “Kiwi” is hugely impacted by the dairy market and tourism industry.
Minor currency pairs
When a currency pair doesn’t include the US dollar, it’s called a minor currency pair or a cross-currency pair.
Here are a few minor currency pairs:
EUR/GBP — Euro/British pound
EUR/AUD — Euro/Australian dollar
GBP/JPY — British pound/Japanese yen
CHF/JPY — Swiss franc/Japanese yen
NZD/JPY — New Zealand dollar/Japanese yen
GBP/CAD — British pound/Canadian dollar
Exotic currency pairs
Exotic currencies include those currencies which are not widely used in international trade and the context of the currency markets, and the exotic currencies are those that fall outside of the classification of majors and minors. Some of the most popular exotic currencies are:
MXN – Mexican Peso
NOK – Norwegian Krone
SEK – Swedish Krona
ZAR – South African Rand
TRY – Turkish Lira
RUB – Russian Ruble
The exotics are usually traded with USD or the EUR as the base currency, and in some cases with GBP and JPY as well.
Exotic currency offers something different compared to trading the regular majors or minors. So, traders need to have a completely different approach to the market in question. They are manifesting wider bid/ask spreads. Even though in past years, since exotics have grown in popularity and spreads are quite competitive.