Currency Pairs, What Forex Traders Should Know

It is impossible to explain forex trading without mentioning currency pairs. Term “Currency pair” refers to two currencies which is traded one against another. It is written in a mixed codes represent both traded currencies codes.

For example, to represent currency trading of British Pound Sterling against US Dollar, we write and or call it GBP/USD or GBP-USD. Below are several basic things related to currency and currency pairs that every trader should knows.

Currency Codes
The common currency codes used recently are based on ISO 4217. It is a list of standard currency names and code elements established by the International Organization for Standardization.

The first two letters of the code are the two letters of ISO 3166-1 alpha-2 country codes and the third is usually the initial of the currency itself. This coding model has been widely used in many financial companies and activities. We can see that at least it helps eliminating the problem caused by the names dollar, franc and pound being used in many different countries.

Major Currencies
“Major Currencies” usually refer to seven most liquid or most traded currencies in the market. Those seven are US Dollar (USD), British Pound (GBP), Eurozone Euro (EU), Japanese Yen (JPY), Swish Franc (CHF), Canadian Dollar (CAD) and Australian Dollar (AUD).

Minor Currencies
Simply, “Minor Currencies” refer to all currencies other than those major currencies. Following table shows currency distribution of reported market turnover (in %). I captured this from the pdf document of Triennial Central Bank Survey released on December 2007.
Commodity Currencies
In general financial topic “commodity currencies” points to currencies of countries which rely heavily on commodity exports for a major share of their export income. According to IMF studies there are 58 countries which could be included here. In forex trading discussion “commodity currencies” usually refer to the Australian Dollar, Canadian Dollar and New Zealand Dollar

Major Currency Pairs or Major Pairs
Historically, forex is “USD-Centered” by mean that in any currency exchange process the first step had to be a convertion into USD. I’m not sure what the real reason was, it could be related to the world’s economics-reordering after the 2nd World War (which we know has become US-Centered) or probably just for somekind of standardization purpose.

It is probably why in forex trading discussion “currency pairs” often spesifically refers to any pairs which includes the USD. In the opposite, “cross currency” refers to any pairs which doesn’t include the USD.

Then, what is Major Pairs? Some trader use it to refer the seven most liquid pairs: EUR/USD, USD/JPY, USD/CHF,GBP/USD, AUD/USD, NZD/USD and USD/CAD. Some others say that major pairs are only EUR/USD, USD/JPY, USD/CHF and GBP/USD and the other three (AUD/USD, NZD/USD and USD/CAD) are commodity pairs. I think both opinions are acceptable.

Commodity Pairs
As I write above, this term refer to three of the seven most liquid currency pairs:AUD/USD, NZD/USD and USD/CAD. Obviously this classification relate to above definition of “commodity currencies”.

Cross Currency
Also has been noted above, this refer to any pairs which doesn’t include the USD. Cross currencies simplify the process of exchanging currency without any need to firslty convert it into USD.

Currency Pairs Nickname
This is the funny part, some currency pairs have their own nickname. Some are as follow:
Cable for GBP/USD
Euro for EUR/USD
Geppy for GBP/JPY
Loonie for USD/CAD
Kiwi for NZD/USD
Swissy for USD/CHF
Gopher for USD/JPY
Beaver for USD/CAD

“Cable” was given to GBP/USD for a reason that in the old time the synchronization of GBP/USD rate between the London and New York markets were transmitted through a cable running beneath Atlantic sea.