Foreign exchange is largely an over-the-counter market, meaning trading takes place on electronic platforms and via telephone between banks and other market participants. Today only about three per cent of foreign exchange is transacted on exchanges in the form of futures and options contracts.
What is traded on the foreign exchange market? The simple answer to this question is currencies.
Although currencies from every country make up the foreign exchange market, most volume is concentrated in a small number of currencies. These currencies that are traded most often are called major currencies. They are:
USD: United States / Dollar
EUR: Euro Zone / Euro
JPY: Japan / Yen
GBP: United Kingdom / Pound
CAD: Canada / Dollar
CHF: Switzerland / Franc
AUD: Australia / Dollar
Similar to the major currencies, there are major currency pairs, which are the most commonly traded currency pairs. These major pairs are:
EUR/USD: Euro Zone / United States
USD/JPY: United States / Japan
GBP/USD: United Kingdom / United States
USD/CHF: United States / Switzerland
USD/CAD: United States / Canada
AUD/USD: Australia / United States
Notice how the USD is involved in each of these currency pairs. The reason behind this is that the USD is the reserve currency of the world, as it has the world’s biggest economy with a stable political system. The USD can be trusted as a fallback currency as it has the highest amount of strength when compared to other currencies.
Although these are the most commonly traded currency pairs, it doesn’t mean that they are the only ones that can be bought and sold.
There are also major currency crosses, also called, “minor pairs”, and exotic currency pairs.
Major currency crosses are currency pairs that involve the major currencies but don’t involve the USD in the pair. There are many currency crosses as many different combinations can be made but the most common minor pairs involve the euro, yen, or the pound, the most commonly traded one being the EUR/JPY pair.
Exotic pairs are currency pairs that involve the USD and a currency of an emerging economy. Some of the exotic pairs are:
USD/NOK: United States / Norway
USD/DKK: United States / Denmark
USD/SEK: United States / Sweden
USD/MXN: United States / Mexico
USD/ZAR: United States / South Africa
USD/THB: United States / Thailand
USD/HKD: United States / Hong Kong
USD/SGD: United States / Singapore