Minor Currency Pairs Explained – Are They Right for You
In many ways, it’s major currency pairs that continue to dominate the forex market. In fact, the world’s seven major pairs account for 68% of all daily trading volumes, while the US dollar is on one side of 88% of all forex trades.
However, it’s minor and exotic currencies that comprise the overwhelming majority of currencies traded both on and offline, while the former offer unique and often understated benefits to investors across the board.
But what are minor currency pairs, and should you consider incorporating them into your portfolio? Here’s our take!
What Are Minor Currency Pairs?
The seven major currency pairs pit various currencies from the developed world against the USD. Conversely, exotic pairs pit the greenback against currencies from developing and emerging economies, including Turkey, Russia and Brazil.
However, when a currency pair doesn’t feature the US dollar at all, this is referred to as a ‘minor’ or ‘cross-currency’ pairing that sits somewhere in the middle of the vast forex marketplace. Here’s a snapshot of the most widely traded minor pairs:
- EUR/GBP – Euro/British pound
- EUR/AUD – Euro/Australian dollar
- GBP/JPY – British pound/Japanese yen
- CHF/JPY – Swiss franc/Japanese yen
- NZD/JPY – New Zealand dollar/Japanese yen
- GBP/CAD – British pound/Canadian dollar
- EUR/CAD – Euro and Canadian dollar.
- AUD/JPY – Australian dollar and Japanese yen
As we can see, these pairs include some highly influential currencies, which are backed by powerful economies, broad international trade agreements and relatively stable fundamentals (and monetary policies).
Overall, seven of the eight most traded currency pairs in the forex market are major, but assets such as the EUR/GBP also remain popular among traders.
In fact, this pairing (which is inherently volatile) accounts for approximately 2% of the market’s total daily trading volumes and is the ninth most popular, while it has continued to trade in narrower and increasingly predictable ranges since the UK’s decision to leave the EU in 2016.
Volatility and Liquidity – How Viable are Minor Currencies?
When dealing with a minor pairing such as EUR/GBP, you’ll also access increased liquidity due to demand and the ease with which the Euro can be bought and sold in the real-time market.
In fact, this particular asset is arguably more liquid than some major currency pairings, making it a popular target for scalpers and day traders who look to leverage volatility within relatively short periods of time.
You may also be surprised to note that a handful of the best minor pairings are more volatile than major currency pairs, recording a higher volume of price swings over a concerted period of time.
Once again, this is ideal for traders with a short-term outlook, as higher volatility translates into a higher number of trading movements per individual trading session. This means more opportunities to trade and drive incremental profits, and incorporating minor pairs into your portfolio can prove highly beneficial in this respect.
Understanding How the Dollar Impacts Major Pairs
As we’ve already touched on, all major currency pairings include the dominant greenback, with the US established as the most economically powerful and influential economic powers in the world.
Because of this, the dollar accounts for approximately 58.81% of the world’s total currency reserves, while macroeconomic events and geopolitical conflicts that affect the US are known to send shockwaves throughout the Western world.
This exposes all major and exotic currency pairings to the fundamental factors that affect the dollar and the US economy, creating a disadvantage in some respects as it can be harder to identify viable trends and speculate on future price shifts.
Conversely, most minor pairs are considerably more predictable and less likely to be adversely impacted by fundamentals, allowing you to trade with far greater conviction and minimise your exposure to risk.
This is a huge boon for those learning how to trade forex for beginners, as it provides crucial insight as you look to naturally minimise your risk without compromising on the number of opportunities that you have as an investor.
The Last Word
Trading for beginners can be challenging, especially when looking to crack the inherently volatile and highly leveraged forex market.
Whenever you start your part or full-time career as a forex trader, you’ll often be advised to prioritise major currency pairs featuring the US dollar. However, it should be noted that minor pairings also offer considerable value, while providing access to a wider range of options overall.
In the case of popular minor pairings such as the EUR/GBP, you’ll also be able to leverage an incredibly liquid and volatile asset that has become increasingly easy to predict over the course of the last six years.
Ultimately, diversification is key to any successful investment portfolio, even those that include a single asset class. In the case of currency trading, it makes sense to combine major, minor and exotic pairings as a way of minimising market exposure, while ensuring that you strike the delicate balance that exists between risk and reward.
So, while minor pairings are often misunderstood and easily overlooked, they can add immense value to your forex portfolio and help diversify your existing interests.
