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The US dollar is undoubtedly the most traded currency in the world, comprising nearly 90% of all forex transactions. All the 7 major pairs include the US dollar. These are:
Minor currency pairs are forex pairs that do not include the US dollar. These are also cross currency pairs that involve trading in major currencies except USD, such as EUR, GBP, JPY, CHF, CAD, AUD, and NZD. Trading in minor FX pairs helps forex traders get wider access to markets and diversify their portfolios beyond the US dollar.
There are several advantages of trading minor pairs in addition to giving exposure to the wider global FX markets:
Depending on the economy and events in the countries involved, each minor pair has unique trading dynamics. This makes minor pair trading exciting for FX traders.
Each minor pair is affected by a multitude of factors. Some of these factors have a deeper influence on the forex pair. Here’s a look at the most significant factor for the popular minor currency pairs.
This forex pair is often referred to as the Chunnel. The interest rate policies of the two central banks directly impact this minor currency pair. For instance, the rate cut announced by the Bank of England (BoE) on August 1, 2024, drove the Chunnel 2.36% higher in the week following the announcement. The two economies are closely linked due to their geographical proximity and the ongoing policy changes after Brexit.
Since an interest rate announcement has the potential to significantly move markets, experienced FX traders observe the driving factors that affect central bank decisions. For instance, market sentiment around the EUR/GBP turned bullish after the UK released its inflation data within the 2% threshold for the second consecutive month in the last week of July 2024.
Both Australia and Japan are island nations. The interplay of the fiscal policies of the two nations, trade performance, and GDP updates impact this minor currency pair. On July 31, 2024, the Bank of Japan (BoJ) raised its interest rate to 0.25%, sending the yen sharply higher for several days. While the Australian dollar had underperformed most major currencies in the 12 months to July, the BoJ’s policies helped strengthen the Japanese yen.
The JPY is also significantly impacted by the interest rate differential between the Fed and BoJ. This is because both are among the top 5 economies in the world. JPY declined more than 5% against the USD in July 2024 due to higher speculations of the Fed cutting interest rates in its meetings ahead. This, in turn, lent support to the AUD/JPY forex pair.
Australia is among the largest traders of commodities and China is its biggest trading partner. For this reason, the outlook of the Chinese economy impacts market sentiment around the AUD.
Crude being among the largest exports of Canada, movements in the CAD are often driven by fluctuations in oil prices and the global oil demand outlook. Improved projections for global GDP growth drive the demand for fuel, which lends support to the Canadian dollar.
Swiss Franc, on the other hand, is considered a safe-haven. Elections in major economies or geopolitical uncertainties trigger purchases of the CHF.
This CHF/CAD forex pair is often used by carry traders. This is because CHF is a low-yielding safe-haven, while CAD is a high-yielding, growth-linked currency.
Also called the Euppy (pronounced Yuppy), the EUR/JPY comes with tight spreads, similar to major fx pairs. Additionally, it acts as a broader indicator of the global financial markets. Key interest rates and economic data from the Eurozone and Japan impact the pair. For instance, an interest rate cut by the European Central Bank (ECB) may result in an EUR selloff against the JPY.
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