1.4 The 4 Major Products In FOREX Market
Foreign exchange trading primarily involves the exchange of currencies from different countries in the form of currency pairs. The international market mainly trades eight major currencies, which are currently the most widely recognized and traded. In order of trading volume, they are: USD (United States Dollar), EUR (Euro), JPY (Japanese Yen), GBP (British Pound), AUD (Australian Dollar), CHF (Swiss Franc), CAD (Canadian Dollar), and NZD (New Zealand Dollar). These eight currencies account for 84% of the global foreign exchange market’s trading volume.
Although the trading volume of the Chinese Yuan (CNH) has surpassed the Australian Dollar (AUD) in recent years, ranking fifth, just after the British Pound (GBP), it is not considered a mainstream currency in the foreign exchange market due to its limited convertibility.
When these eight major currencies are paired with each other, they are divided into two categories: direct pairs and cross pairs. In simple terms, if the US Dollar (USD) is involved in the pair, it’s a direct pair; if not, it’s a cross pair.
Here are the seven major direct pairs, which account for the majority of trading volume, making them highly liquid with relatively lower trading costs:
Direct Pairs (Currency pairs composed of the US Dollar and other major currencies): EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, USD/CAD, NZD/USD.
Cross Pairs (Currency pairs composed of two major currencies other than the US Dollar):
EUR/CHF, EUR/CAD, EUR/AUD, EUR/GBP, EUR/NZD, EUR/JPY
AUD/CAD, AUD/CHF, AUD/NZD, AUD/JPY
CAD/CHF, CAD/JPY, CHF/JPY
GBP/NZD, GBP/JPY, GBP/AUD, GBP/CAD, GBP/CHF
NZD/CAD, NZD/CHF, NZD/JPY, and so on.
What does the magnitude of price fluctuations in currency pairs indicate?
We often observe that currency pairs fluctuate most of the time, meaning their prices are either rising or falling. This indicates that one currency in the pair is strengthening or weakening relative to the other. For example, when both the Euro (EUR) and the US Dollar (USD) are appreciating simultaneously, the EUR/USD price will only fluctuate slightly. However, if, at the same time, the Japanese Yen (JPY) is depreciating, then the EUR/JPY and USD/JPY prices will experience significant increases.
The movement of each currency pair is relative. We can think of it as two people arm wrestling. When both sides are evenly matched, they may appear still, but that doesn’t mean they aren’t exerting effort. Exchange rates fluctuate based on which currency is currently stronger.
In summary, the foreign exchange market involves trading various currency pairs, with each pair representing the exchange rate between two currencies. The magnitude of price fluctuations in these currency pairs reflects changes in the relative strength of the two currencies involved in the pair.