Four Types of Currency Pairs and Their Characteristics

Posted by LeoPrime on Oct 8, 2018 5:27:34 AM

It goes without saying that there are quite a considerable number of currencies that forex traders can choose when trading. However, the vast majority of forex currency traders tend to concentrate on common pairs, such as the EUR/USD, GBP/USD, or USD/HKD etc. But there are certain types of currency pairs.

Here we provide a brief overview of some of the characteristics of four of the most common currency pair types, and why they are important for trading.

Commodity Currencies

Commodity currencies refer to the monetary units of the countries that predominantly engage in commodity imports or exports, such as the Chinese Renminbi, the Australian and Canadian Dollars, the South African Rand, or the Russian Rouble.

High-risk currencies

It is tricky to classify these types of currencies, but usually, high-risk currencies are the currencies of countries that have a high deficit, and/or high interest rates. Examples may include the Bangladesh Taka, Turkey, Sudan, Ukraine, Syria or the currencies of many South American and African countries.

Exporter Currencies

Naturally, as with the word, this term refers to the currencies of countries that have predominantly large forex reserves accumulated through exports, such as nations like Singapore, Japan, China, India, or Mexico. It is worth noting that the value of these currencies is directly related to the health of the global economy. These countries are well-placed to withstand the impact of any economic crisis or shock, due to the nature of their large forex reserves.

Reserve Currencies

These are the currencies of nations which have a dominant role in global economic transactions. The European Union, the United Kingdom, Japan, and the United States (and increasingly China as well), are the important economic powers of which their currencies matter the most. Currently, the Japanese Yen as a reserve currency has been less in demand since the 90’s, while that of the Chinese Renminbi has been steadily increasing since the late 90’s.

However, at the same time, the amazing thing is that the US Dollar has somewhat remained as the one major currency that has not been affected much over the decades. The changes in the UK Pound and the US Dollar are seen like the barometers of the global economy. So, with around 66% of the world’s forex reserves denominated in the US Dollar, so it makes sense that this currency is the reserve currency of the world.

While nothing can be accurately predicted as a general rule, traders tend to believe that reserve currencies usually tend to depreciate in times of economic success, and tend to appreciate during times of economic trouble.

The key to a successful trading career is to carefully evaluate any of the data available very carefully, and establish a well thought after strategy. It is about understanding a currency quote.

Topics: GBP/USD, EUR/USD, USD/CAD, Forex Exchange, Forex, Forex Trading, Forex Trader, Technical Analysis