What You Need to Know About Minor Currency Pairs
Minor currency pairs, also known as cross-currency pairs, are currency pairs that do not include the U.S. dollar (USD) as one of the currencies. In the foreign exchange market, a.k.a forex market, currency pairs are divided into three main categories: major pairs, minor pairs, and exotic pairs.
In a currency pair, the first currency is called the “base currency,” and the second one is the “quote currency.” The exchange rate tells you how much of the “quote currency” you need to spend to purchase one unit of the “base currency”.
It is important to know the difference before you pick your pair for your first forex trade.
Here are some key points to know about minor currency pairs.
Definition
Minor currency pairs consist of two major currencies, excluding the U.S. dollar. They are not as heavily traded as major pairs involving the USD, but they are still actively traded in the forex market, unlike exotic currency pairs.
Liquidity
Minor pairs generally have lower liquidity compared to major pairs, meaning there may be wider spreads and potentially higher transaction costs when trading these pairs.
Examples of Minor Currency Pairs
EUR/GBP (Euro/British Pound)
EUR/AUD (Euro/Australian Dollar)
GBP/JPY (British Pound/Japanese Yen)
NZD/CAD (New Zealand Dollar/Canadian Dollar)
Volatility
While minor currency pairs can be less volatile than exotic pairs, they may still exhibit significant price movements, especially during major economic events or geopolitical developments involving the currencies in the pair.
Trading Hours
The trading hours for minor currency pairs may be more limited compared to major pairs. Traders need to be aware of the specific market hours for the currencies they are trading and stay within those hours where possible to minimise losses.
Also Read: Digital Trading Versus Traditional Stocks: What You Need To Know
Risk and Reward
Trading minor pairs can present both opportunities and challenges. On the one hand, they may offer diversification benefits, but on the other hand, the lower liquidity can result in increased risk. You should carefully consider your risk tolerance and trading strategy when dealing with minor currency pairs.
Research and Analysis
Just like with any other currency pairs, you should conduct thorough research and analysis before trading minor pairs. This includes staying informed about economic indicators, central bank decisions, and other factors that can influence the currencies in the pair. Keep a close eye on the Forex Economic Calendar.
Currency Correlations
Understanding the correlations between minor pairs and other financial instruments can be crucial for risk management. Correlations can change over time, so regular monitoring is essential.
Exotic Pairs vs. Minor Pairs
Exotic currency pairs involve one major currency and one currency from a smaller or emerging market economy, for example, GBP/ZAR. They are generally less liquid and more volatile than minor pairs. The distinction between minor and exotic pairs can vary depending on the broker.
In conclusion, while minor currency pairs may not be as popular as major pairs, they still play a significant role in the forex market. Traders interested in these pairs should be aware of their unique characteristics and consider them within the context of their overall trading strategy and risk management plan.
