Currency Pairs Categories

In our previous lesson we discussed the basics of trading currency pairs, today we’ll see their categorisation.

Currency pairs are split into three main categories, majors, minors and exotics. The major currency pairs have the US dollar on the one side, either left or right, as the US Dollar is considered as the world’s reserve currency since the U.S. and its allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold . Despite the agreement being superseded by the free market system, the US dollar is still considered the global reserve currency. The major currency pairs are the most frequently traded pairs in the world , and they constitute the largest share of the foreign exchange market. Examples of major currency pairs could include the EUR (€) against the USD , the USD against the JPY , the GBP/USD , the USD/CHF , the USD/CAD and the AUD/USD.

The second currency category is the cross-currency pairs or if you prefer the minor currency pairs . These are currency pairs are highly liquid, yet do not include the USD and are also called “cross rates” or “crosses” . They are also known as “minors” and the most actively traded are derived from the three major non-USD currencies: these are the EUR , the JPY , and the GBP . For example: EUR/GBP, GBP/JPY, EUR/CAD.

The third currency pair category is the exotic currency pairs . Those currency pairs are made up of one major currency paired with the currency of an emerging economy or a small economy from a global perspective, such as Hong Kong or Brazil , and several European countries outside the Eurozone . Such pairs could include for example the US Dollar against the South African Rand , or the US Dollar against the Turkish Lira , or the Euro against the Czech Krona . It should be noted that despite exotic currency pairs may provide higher profits, their volatile and sometimes unpredictable nature, may prove a drawback for such trades. Also, the low liquidity and higher spreads are other issues which traders of such pairs may have to face.

In the next lesson we’ll be discussing the evolution of the FX market.