In the forex market, there exist three types of currency pairs, major, minor, and exotic currencies. The currencies are classified depending on the economy backing them as well as the amount of liquidity they command in the trillion-dollar marketplace.
Major Currency Pairs
Major currency pairs is a term used to denote currencies of some of the biggest economies in the world. Likewise, they are the most traded currency pairs in the forex market because of the massive amount of liquidity they command. In addition, the major currency pairs come with the lowest spreads as well as brokerage costs when it comes to trading.
The major currency pairs, in this case, are the EUR/USD pitying the European Union currency vs. the U.S dollar, USD/JPY pitying the U.S Dollar vs. the Japanese Yen, the GBP/USD pitying the British Pound vs. the U.S dollar.
Likewise, USD/CHF pitying the U.S dollar vs. the Swiss Francs, the USD/CAD pitying the U.S dollar vs. the Canadian Dollar, the AUD/USD that compares the Australian Dollar vs. the U.S dollar. Summing up, the top seven major currency pairs is the NZD/USD that compares the New Zealand dollar vs. the U.S dollar.
All the major currency pairs come with the U.S dollar as the base or quotient currency given its lead reserve currency status.
Minor Currency Pairs
Minor currency pairs are a bunch of currency pairs that don’t include the dollar. Often called the cross-currency pairs, minor currency pairs compare the value of currencies of some of the biggest economies, excluding the U.S dollar. The mostly traded minor currency pairs in the forex market are EUR/GBP, EURAUD, GBP/JPY, CHF/JPY, NZD/JPY, and GBP/CAD.
Exotic Currency Pairs
Exotic currency pairs are a special type of currency pairs that seeks to compare the value of major currencies with currencies of developing economies. Unlike major and minor currency pairs, they do not command too much liquidity in the forex market, leading to higher spreads and brokerage costs.
Some of the popular exotic currency pairs include EUR/TRY comparing the Euro vs. the Turkish Lira USD/HKD comparing the U.S Dollar and The Hong Kong Dollar. JPY/NOK comparing the Japanese Yen and the Norwegian Krone.
What Affects Prices of Currency Pairs
Prices of currency pairs fluctuate every time the market is open attributed to a number of social economic and political factors.
Economic growth and outlook of countries’ economies affect the prices of currency pair’s prices. Depending on how traders react to such developments, dictates a lot the direction in which prices move.
Capital flows, which dictate the amount of money that flows in and out of an economy, dictate a great deal price movements of currency pairs. Positive capital flow signals more investment into a country, consequently triggering strong demand for a currency, which makes it be more valuable than other currencies under comparison.
Trade balance between exports and imports also significantly influence currency pair’s prices. Trade deficits many at times cause a currency price to go down relative to other currencies.
Political stability causes a currency price to go up relative to a currency in a country engulfed in political instability.
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