The global forex market is a vast financial entity, and one that sees an estimated $6.6 trillion traded every single day. This unique marketplace is also deceptively complex, with a number of different currency pairings and types available to trade.
Of course, most of you will be familiar with the world’s major currencies, primarily because you may have purchased dollars or Euros when travelling overseas.
However, there are also a raft of minor and even exotic currencies, each of which offer variable opportunities to traders and specific investment strategies. So, let’s find out more about these pairings and the role that they can play in your forex portfolio.
Major, Minor and Exotic Pairs – What You Need to Know
As we’ve already touched, the major currency pairings include the fiat currencies that are bought and sold most across the globe.
For example, the single most dominant currencies are the Euro and the British pound, while the Swiss Franc, Japanese Yen, Canadian dollar, Australian dollar and New Zealand dollar, and major pairs refer to any that include at least one of these assets alongside the US dollar.
The USD remains the single most dominant fiat currency (thanks to its status as the world’s leading reserve), while it’s thought that more than 85% of all global forex market transactions feature just seven of the assets listed above.
Interestingly, minor currency pairs include any two of the major assets apart from the USD, with the most prominent examples being the GBP/EUR and the AUD/JPY.
These pairings are amongst the most traded due to the cumulative GDP of the associated nations and the size of the trading arrangements that exist between them, although less (including the CHF/JPY) are widely accessed despite a less active natural supply and demand.
OK, we hear you ask, but what are exotic currencies? In simple terms, these refer to any other similar assets that have not been previously referenced and tend to feature within developing economies.
Some of the most developed and widely traded include the Hong Kong dollar and the Norwegian Krone, while others such as the Mexican Peso and the Thai Baht are also bought and sold widely across the globe.
Exotic pairings include one major and one exotic currency, with popular examples represented by the USD/MXN and the EUR/NOK.
The Role of Currency and Developing Viable Trading Strategies
You can access the vast majority of these pairings through tools such as the MetaTrader4, while it’s important to understand the role that liquidity plays when choosing which pairs to include in your portfolio.
Liquidity refers to the extent with which a market allows assets to be bought and sold at a stable and transparent price. In the case of the forex market, the most liquid pairings tend to benefit from a natural supply and demand from exporters, in addition to rising capital inflows from overseas.
In this respect, pairings such as the GBP/EUR tend to offer the highest levels of liquidity, creating an opportunity for investors to operate according to relatively stable trends and optimise their profit margins over a number of individual trades.
Such pairings also benefit from lower spreads, with the EUR/USD boasting the highest level of liquidity of any pair in the world and spreads as low as 0.1 pip.
In the current climate, most investors are erring on the side of caution, by focusing on a couple of carefully selected pairings that are dominated by major currencies.
However, there are some benefits to mixing up your portfolio, especially as the economy begins to recover tentatively from Covid-19. After all, exotic pairs may offer higher returns due to wide price fluctuations, and could prove effective if you have the requisite capital and are able to leverage viable stop losses.