Most currency transactions involve the ‘Majors’, consisting of the British Pound (GBP), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF) and the US Dollar (USD). Whilst these are the key five currencies, the Canadian Dollar (CAD) and the Australian Dollar (AUD) are starting to be considered as additional ‘major’ currencies.
Currencies in Pairs
The logic for currency pairing, is that if we had a single currency alone, we would have no means to measure its relative value. By pairing two currencies against each other a fluctuating value can be established for one versus the other.
Currency Pairs that do not include the US dollar are commonly referred to as Cross Currency Pairs. Cross Currency trading can open a completely new aspect of the Forex market to speculators. Some cross currencies move very slowly and trend very well. Other cross currency pairs move very quickly and are extremely volatile with daily average movements exceeding 100 pips
Since foreign currencies are quoted in terms of value of one currency against another, a Forex currency pair consists of an acronym for both currencies, separated by a slash ‘/’. The acronyms used were established in 1947 and we have listed a few below:
- GBP = Great British Pound
- EUR = Euro
- CHF = Confoederatio Helvetica Franc (Swiss Franc)
- USD = United States Dollar
- CAD = Canadian Dollar
- JPY = Japanese Yen
- AUD = Australian Dollar
- NZD = New Zealand Dollar
Currencies are always traded in pairs, for example EUR/USD, USD/JPY. Every position requires the buying of one currency and selling of another. When someone says they are ‘buying the EUR/USD’, they are buying Euros and selling Dollars.
There are many other Forex currency pairs available to trade, such as the Danish Krone, Mexican Peso, and Russian Ruble. However, these currency pairs are generally traded less, and are not considered major currencies.
Major Forex Currency Pairs
Some Forex currency pairs are traded more heavily than others. The currency pairs that have the most volume consist of the ‘majors’. It is widely agreed that the following 6 pairs are considered the majors:
For example, let’s assume a Forex trader buys 1 standard lot of GBP/USD. The current exchange rate is 1.9615. Essentially this trader is buying 100,000 Pound in exchange for $196,150. Again, for example’s sake, assume the Forex market rate rose 15 PIPs to 1.9630 and the trader liquidates the position. The same 100,000 Pound is now worth $196,300, the trader realizing a $150 profit.
Nicknames are sometimes used for currency pairs. Here is a list of Forex currency pairs and commonly used nicknames for each:
- GBP – Pound, Cable, or Sterling
- EUR – Euro
- CHF – Swissy, or Franc
- USD – Greenback
- CAD – Loonie
- AUD – Aussie
- NZD – Kiwi
- JPY – Yen
When we execute a Forex transaction, we essentially borrow one currency and lend another. This borrowing and lending is like any other banking transaction and therefore subject to interest rates. The interest is referred to as the SWAP rate in the currency markets. The Swap is a credit or debit as a result of daily interest rates. When traders hold positions overnight, they are either credited or debited interest based on the rates at the time.