Currency trading has been around for centuries, but the rise of digital currencies has brought new opportunities and challenges to the market. Understanding the differences between major, minor, and exotic currency pairs is essential for anyone looking to invest in this space.
What is a Currency Pair?
A currency pair is a term used in the foreign exchange (forex) market to describe the relationship between two currencies, and how they can be traded against each other.
In a currency pair, the first currency is called the base currency, while the second currency is called the quote currency or counter currency. The value of the base currency is always expressed in terms of the quote currency.
For example, in the EUR/USD currency pair, the euro is the base currency and the US dollar is the quote currency. If the current exchange rate is 1.2000, this means that one euro is equal to 1.2000 US dollars.
Currency pairs are traded on forex markets, and traders can buy or sell a currency pair based on their expectation of how the value of the base currency will change relative to the quoted currency. The fluctuations in the exchange rates of currency pairs are influenced by various factors such as economic data, geopolitical events, and central bank policies.
Currency pairs are a fundamental concept in the world of trading, as they represent the relative value between two different currencies. However, with the rise of cryptocurrency, traditional currency pairs have had to adapt to include these new digital assets.
Crypto-currency pairs represent the relative value between a cryptocurrency and a fiat currency, such as USD or EUR. For example, BTC/USD represents the value of Bitcoin in US dollars. As cryptocurrencies become more mainstream, the inclusion of crypto-currency pairs in trading platforms has become increasingly common. This allows traders to speculate on the price movements of cryptocurrencies against traditional currencies, providing a wider range of investment opportunities.
What are the Major World Currencies?
The major world currencies can be defined by the height and frequency of their trading volume. Those with the highest average trade volume are widely accepted as the major world currencies.
According to the foreign exchange market (Forex), the US dollar has the highest trading volume of all currencies and is involved in over 80% of all foreign exchange transactions. In 2020, the Euro and Japanese Yen ranked behind the dollar in their foreign transaction volume, contributing to at least 33% (JPY) and 23% (EUR) of Forex transactions.
The foreign exchange market indicated the world’s major currencies are the:
- US dollar (USD)
- Euro (EUR)
- British Pound (GBP)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
- Canadian Dollar (CAD)
- Australian and New Zealand Dollar (AUD), (NZD)
What are Major Currency Pairs?
While there are at least 8 major currencies in the world, there are only 7 major currency pairings that are traded on the foreign exchange market. This is because a major currency must involve the dollar as the base, or counter currency, in the trade – and of course, the dollar cannot be traded with itself (USD/USD).
There is some debate about which pairings should be considered as major currency pairs since the concept can be understood both from an economic (trading volume) and speculative standpoint.
As it currently stands, the major pairs are displayed on the table below:
What are Minors and Exotics?
Minor trading pairs occur when a major currency is traded with another, such as the Swiss Franc and the Euro. Without the appearance of the US dollar, the currency pair in question is defined as a minor currency pair.
Popular examples of Forex minor currency pairs are displayed in the table below:
An exotic currency pair is a term used to describe the trading of a developing economy’s currency – as either the base/counter currency – with another major currency.
Often when trading with exotic currencies, traders must be diligent and experienced in the field and account for destabilising factors that affect currency value. In the case of exotic currencies, these factors can be the political or economic agenda of the country that increase volatility and trigger extreme movements or wild swings within the exotic trading pairs.
Why is the US Dollar so important?
The prevalence of the US dollar in the foreign exchange market can be attributed to a pivotal point in history: The Bretton Woods Agreement of 1944. The intention was to create an efficient foreign exchange system that would promote economic growth on an international scale, and utilise economic competition to safeguard against the extreme devaluation of currencies.
Despite the eventual fall of the Bretton Woods system in 1971, the value of the US dollar continues to prevail. As of the agreement, participating countries concurred that their respective currency would be pegged to the fluctuating value of the dollar. However, at the time of the system, the currency valuation of the US dollar had a basis in allocated gold, due to the abundant stores of American reserves. Now, this is no longer the case.
In 1971, when the US gold supply was considered insufficient to cover the number of dollars in circulation, president Nixon famously devalued the USD when he suspended the ability for citizens to convert their dollars into gold. With gold quite literally out of the trading equation, countries that participated in the agreement suddenly had more autonomy over their currency exchange agreements, making them free-floating.
The Future of Currency
When considering the volatility of exotic currencies, it is significant to witness nations such as El Salvador shaking up the financial market by making Bitcoin legal tender back in 2021. As an emerging market economy (EME), reliance on Bitcoin, and further broadening country-wide use of cryptocurrency, have produced a considerable response from Salvadorians.
As the first country to utilise virtual currency as legal tender, many have opposed the introduction of Bitcoin due to fears surrounding its instability. This anxiety was coincidentally proven to be true on the first day Bitcoin was introduced as legal tender when the cryptocurrency fell by 20% of its value.
It seems that currency, or more widely money, must act as a medium of exchange in addition to a store of value. Currencies exchanged on the Forex market are known as fiat currencies and, even in the case of the US dollar, have depreciated in value over time.
El Salvador is just one example of a country adopting alternatives to fiat currency. More widely, emerging economies are desperately seeking new currencies that are not susceptible to the depleting effect of inflation. In light of this, we should question whether Bitcoin and other cryptocurrencies more generally, are the right option for emerging markets. Since 2021, the price of Bitcoin (BTC) has demonstrated inherent volatility. It’s only more recently, in April 2023, that we’re seeing market optimism as well as liquidations of short positions helping push Bitcoin past the $30,000 mark for the first time since June 2022.
Could the implementation of gold as currency once again, perhaps, be the solution for countries looking to elevate the stability and prosperity of their economy? What if this gold was digitalised, made portable through a mobile phone and underpinned by the efficient, peer-to-peer, blockchain technology, much the same as Bitcoin operates on?
Kinesis has already rolled out public-private partnership projects in Indonesia, to create a stable foundation for emerging economies, bringing forward a system that enables the spending, trading and storing of gold as currency. By making KAU – Kinesis’ native gold-backed currency – legal tender, could developing nations establish a new monetary path that introduces, anew, the enduring value of gold seen in the Bretton Woods era?
It seems that only time will tell.
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This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
