Explaining the Difference Between Major, Minor, and Exotic Currency Pairs
The forex market has a long and illustrious history that’s not so well known to many. In a nutshell, after the second world war, the EU was teetering on the edge of economic collapse and needed a way to stabilise its currencies. The Union entered into the 1944 Brenton Woods Agreement that pegged its currencies on the US dollar and the dollar on gold, which solved its issue but gave the United States an unfair advantage.
However, after the US abused its power by over-printing its currency, France evoked its right to redeem dollars into gold, ending the dollar’s reign and creating the fiat currency system we know today. Furthermore, currencies were assigned a value depending on their role and the country’s position in facilitating trade between nations. Naturally, some were more valuable than others, hence the major, minor, and exotic currency pairs in trades today.
Major Currency Pairs
These are the most traded currency pairs on the forex market. They represent the highest volumes and liquidity, as well as the lowest risks and spreads. The best forex brokers pair these currencies with the US dollar, which is involved in 88% of all forex trades, making it the world’s most traded currency. The major currency pairs include:
- GBP/USD – British Pound / US dollar
- EUR/USD – Euro / US dollar
- USD/JPY – US dollar / Japanese yen
- USD/CHF – US dollar / Swiss franc
- USD/CAD – US dollar / Canadian dollar
- AUD/USD – Australian dollar / US dollar
- NZD/USD – New Zealand / US dollar
Minor Currency Pairs
Minor currency pairs are less popular than major ones and occur when a currency pair does not include the dollar. This means they can be riskier than a major pair and attract wider spreads from brokers. Their liquidity can also be low and be more challenging to trade in. Here are a few examples of minor currency 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
Exotic Currency Pairs
Exotic currency pairs comprise a major currency paired with a currency from a developing nation such as South Africa or Mexico. They are rare and riskier than the major and minor pairs, which also means they attract high spreads and are only profitable in particular conditions. Examples of exotic currency pairs include:
- EUR/TRY – Euro / Turkish lira
- GBP/ZAR – British pound / South African rand
- JPY/NOK – Japanese yen / Norwegian krone
- NZD/SGD – New Zealand dollar / Singapore dollar
- USD/HKD – US dollar / Hong Kong dollar
- AUD/MXN – Australian dollar / Mexican peso
What are Their Differences?
- Makeup
Major currency pairs consist of the eight most prominent currencies, and all the pairs must include the dollar. At the same time, the makeup of minor currency pairs consists of pairs made up of the major currencies without featuring the dollar. On the other hand, an exotic currency pair consists of a major currency paired with one from a developing nation. - Risks and Spreads
Major currency pairs have the most liquidity and are the least risky option of all three. They also attract lower spreads, while the other two can be progressively riskier and attract wider spreads. - Volatility
Major currency pairs are consistent and predictable, while minor and exotic pairs can be volatile and less predictable. Third-world countries’ economies don’t have the same shock absorption capability as some of the more advanced economies, and small ripples can have advanced effects.
Which One Should You Trade?
Honestly speaking, there is no one right answer to this question. The truth is that you can make good profits trading either; the most essential thing is having the requisite skills and information to help make the trades. However, if you’re new to trading and still don’t understand the industry’s intricacies, stick to the major and minor pairs. They are less risky and present multiple opportunities you can take advantage of.
But this is in no way to say you cannot make money trading exotic currency pairs. On the contrary, they present some of the best margins, even though they are riskier and have wider spreads. And once you learn the characteristics and personalities of each, you can trade them interchangeably with changing market conditions for the best returns.
