Reserve Currencies:
These are the currencies of major influence in the world because of their leading role in global economy. The currencies that belong to this category are:
- the Euro,
- the US Dollar,
- and the Japanese Yen.
What you need to understand as a forex trader is that when reserve currencies are included as a group of currency pairs, they tend to depreciate when the economy is booming, and appreciate in times of economic turmoil.
Commodity Currencies:
Currencies used by dominant exporting countries, such as Australia, Canada, Brazil, South Africa, and Russia, are called Commodity Currencies. Because of the large influx of currencies generated by the exporting commodities, the values of these commodity currencies is influenced greatly by the economy of global market at any given time.
Exporter Currencies:
Currencies of Singapore, Japan, and China, are called Exporter Currencies because they have a large amount of forex reserves accumulated through exports. The value of these currencies depends on the health of global economy and they tend to depreciate when the world economy is struggling.
High-Risk Currencies:
High-risk currencies are similar to junk bonds in a stock market; they pose greater risks of volatility and high interest rates. The high–risk currencies tend to appreciate when the economy is booming, and depreciate during the times of economic uncertainty.
Major Currency Pairs Characteristics:
EUR/USD:
EUR/USD is the most widely traded currency pair in the currency market with about 28% of total daily trading volume. EUR/USD is considered a good currency pair for new forex traders because of its relatively slow movement compared to other major currency pairs.
The EUR/USD is typically considered to be negatively correlated to the USD/CHF and positively to the GBP/USD in the forex market. Since USD/CHF tends to lead the move ahead of EUR/USD, it can serve as a precursor to what might happen next to EUR/USD.
If you are trading EUR/USD, it is a good idea to compare both EUR/USD and USD/CHF charts to see if there is anything that could predict future moves of EUR/USD. For example, if USD/CHF breaks above a key resistance level and EUR/USD hasn’t broken support level yet, then it can be predicted that the EUR/USD is most likely to break below support level at any time.
USD/JPY:
According to the survey from Bank for International Settlements (BIS), the second most traded major pair is USD/JPY with 17% of total daily trading volume. This currency pair tends to generate less false breakouts; the breakouts are often true and sustained. When Bank of Japan intervenes in an attempt to strengthen the Japanese Yen, it could move USD/JPY lower.
GBP/USD:
GBP/USD is another popular currency pair with approximately 14% of total daily trading volume and is the third most traded major currency pair. The GBP/USD is one of the most volatile currency pairs and it has a tendency to generate many false breakouts and wild sudden movements.
For this reason, GBP/USD may not be a good currency pair to trade for inexperienced traders; this currency pair is more suitable for experienced forex traders.
Watch out for important economic news releases from the United Kingdom and United States, as they tend to make the GBP/USD move a lot in one direction without much retracement. News releases such as higher yield and positive growth of the UK could drive GBP/USD higher.
USD/CHF:
USD/CHF has a total daily trading volume of 4% and is the least liquid among all other major currency pairs. The USD/CHF is often negatively correlated to the EUR/USD. Positive news about global stability and economic recovery tend to send USD/CHF higher. It could also rally on geopolitical instability. Therefore, if you are trading USD/CHF, keep informed of global economy and politics.
IMPORTANT NOTICE: The information described above is a simplistic generalization of currency trends and characteristics. In reality, there are many other factors that could potentially affect the currency market. The key to becoming a successful forex trader is to carefully evaluate all the data and establish a disciplined methodological strategy to maximize your potential profits.
For more information about the risks involved in forex trading, check out RISK MANAGEMENT.