January 5, 2021 | by elpidios
You have probably heard the term Forex before. Well, I bet you did!
Forex is definitely a hot topic, since it is the largest and most volatile market in the world with an astonishing $6.6 Trillion trade volume every single day. Yes! $6.6…with a T.
Currency pairs come from different corners of the world as they belong to some of the strongest economies around the globe. With hundreds of currency combinations to choose from, deciding which pair to trade might be a struggle.
But, we did the research and we are presenting the currency celebrities – a list with the 10 most traded currencies in the world!
Welcome to the battle of the currencies.
To simplify things, we created a list of the ten most traded forex pairs on the market:
The Euro Dollar is the superstar of the currency pairs as it is the most traded pair on the market, with EUR/USD transactions making up 24.0% of daily forex trades in 2019 (BIS, 2019). The pair’s popularity is not merely a coincidence, since it reflects the world’s two biggest economies: the European and the US market.
The high trading volume of the EUR/USD ensures that the pair has a lot of liquidity and low spreads – two elements alluring for traders. Liquidity and tight spreads open doors for large trades with little impact on the market.
The exchange rate of EUR/USD is determined by a number of factors, such as the interest rates set by the European Central Bank (ECB) and the US Federal Reserve (Fed). It is common that the currency with the higher interest rates will generally be in higher demand because higher interest rates give a better return on their initial investment. If for instance, the ECB had set higher interest rates than the Fed, it is likely that the euro would appreciate relative to the dollar.
Next on the list: The Dollar Yen pair, or else, the ‘Gopher’.
The second most actively traded pair has been the US dollar and the Japanese yen, with 13.2% daily trading volume.
Due to the fact that the yen is the most heavily traded currency in Asia, and the US dollar is the most commonly traded currency in the world, the USD/JPY is known for its high liquidity.
This pair tends to be sensitive to political sentiment between the United States and the Far East, while the Bank of Japan (BoJ) sets the interest rates for the Japanese economy which, in turn, affects the value of the yen relative to the US dollar.
Also known as the ‘Cable’, the Pound Dollar makes up 9.6% of the daily forex transactions, according to the most recent BIS data.
Following the same concept like most other currency pairs, the strength of the GBP/USD pair comes from the respective strength of the British and American economies. If the American economy is growing at a faster rate than that of Great Britain, it is likely the dollar will strengthen against the pound and vice versa.
AUD/USD, or commonly known as the ‘Aussie’, represents the Australian dollar against the US dollar. The exchange rate of this pair shows how many U.S. dollars one has to spend in order to purchase one Australian dollar. It made up 5.4% of daily forex trades in 2019.
The value of the Australian dollar is reflecting the country’s economy. One of the factors to influence the value of AUD/USD is the interest rate difference between the Reserve Bank of Australia and the Federal Reserve.
Another factor that can strengthen or weaken the AUD is the value of the country’s exports, as metal and mineral exports make up a large proportion of the country’s gross domestic product (GDP). A collapse in the value of these commodities would likely cause a reciprocal weakening in the value of the Australian dollar.
The ‘loonie’ or else the USD/CAD represents the pairing of the US dollar and the Canadian dollar. In 2019, USD/CAD transactions made up 4.4% of daily forex trades.
Canada’s main export is oil, hence the strength of the Canadian dollar is closely related to the oil price. At the same time, oil is priced in US dollars on the world markets, giving Canada a large supply of US dollars through its exports. Therefore, if the oil price rises, it is likely that the value of the Canadian dollar will strengthen compared to the US dollar.
When trading the ‘loonie’, traders should keep an eye on the price of both Brent crude and US crude, as any fluctuations in the oil market will likely reverberate in the exchange rate of this currency pair.
The USD/CNY currency pair is the partnership of the US dollar and the Chinese Renminbi, while the term Yuan can be used to describe the base unit of the Chinese currency. Recent changes to protocols by Chinese authorities have led to the introduction of a deliverable offshore Renminbi currency market, commonly referred to as CNH.
Confused? Bear with us a bit longer, and things will start making sense.
Since 2010, China has traded two different exchange rates depending on location. When trading onshore mainland China it is referred to as CNY, while offshore trading is known as CNH.
After the reforms on Forex in 2010, when China internationalized their currency, the CNH market is growing rapidly and gradually, restrictions are being lifted, creating a great opportunity for Forex traders. The CNH has traditionally not been as controlled as CNY by the Chinese government, which means it can be more volatile. And traders love volatility!
When trading the USD/CNY (or USD/CNH) one should keep an eye on the US-China trade war as any developments are likely to affect the price of this currency pair.
Trading the ‘Swissie’ or else the US dollar and the Swiss Franc. USD/CHF is hitting the top 10 list with 3.6% of the daily forex volume in 2019. CHF is shorthand for ‘Confoederatio Helvetica’ Franc, and represents the economy of the neutral nation situation in the center of Europe.
Why the ‘Swissie’?
The financial sector, and especially the banking sector, is one of the cornerstones of the Swiss economy. The Swiss financial system has historically been a safe haven for investors and their capital, as Switzerland has long been a key banking center for customers around the world. Investors value the secrecy and safety that Swiss Banks provide, bringing at the same time, considerable strength to the Swiss Franc.
On the 8th place, we find the USD/HKD that puts the Hong Kong dollar against the US dollar. Hong Kong is a key finance hotspot for China as multinational companies set up operations and it is a business magnet for people from all over the world.
Hong Kong is also attractive as a financial center because the currency there, the Hong Kong dollar, is more or less firmly pegged to the US dollar, with a unique system known as a linked exchange rate.
The Hong Kong dollar is allowed to fluctuate within a band of HK$7.75 to HK$7.85 to US$1, and traders can take advantage of any price movements within this band.
The Euro vs the British Pound. Of course the EUR/GBP pair made the most traded currencies list. This pair represents a cross between the two largest economies in Europe, the Euro Zone and the United Kingdom.
As with the other currency pairs on this list, traders should keep an eye on any ECB and BoE announcements which could affect the exchange rates of the euro and the pound, which would increase volatility further.
Brexit and the uncertainty of the situation, had caused the EUR/GBP pair to fluctuate in price quite unpredictably. The high level of volatility can be attractive to traders, but it is important to have a risk management strategy in place before opening a position in a volatile market.
It is highly recommended for traders interested in the EUR/GBP pair, to follow Brexit developments as it can directly affect the price of the currency pair.