Hey FX Traders, Look Out for These Minor Currency Pairs

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:

• Euro and US dollar: EUR/USD
• US dollar and Japanese yen: USD/JPY
• British pound and US dollar: GBP/USD
• US dollar and Swiss franc: USD/CHF
• Australian dollar and US dollar: AUD/USD
• US dollar and Canadian dollar: USD/CAD
• New Zealand dollar and US dollar: NZD/USD

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. 

Advantages of Trading Minor Forex Pairs

There are several advantages of trading minor pairs in addition to giving exposure to the wider global FX markets:

• Sufficient liquidity for filling orders, since all the forex pairs involve major currencies.
• Unique entry and exit points offer attractive trading opportunities for strategic forex traders.
• Diversification beyond major forex pairs reduces exposure to risks associated with the US dollar. This prevents the portfolio from being affected by the movements in a single currency.
• High volatility creates more opportunities for FX traders. This enhances potential profitability.
• Major currencies have more predictable swings than those of emerging and frontier economies.
• Lower correlation among forex pairs offers unique hedging opportunities as these many not follow the broader market trends.

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. 

Factors that Affect Minor Forex Pairs

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.

EUR/GBP: Interest Rates Differentials of the Central Banks

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. 

AUD/JPY: Overall Geopolitical and Economic Events

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.

CHF/CAD: Global Economic Outlook

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.

EUR/JPY: Policies and Global Outlook

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. 

Tips to Trade Minor Forex Pairs

• Choose currencies with higher liquidity during your preferred trading hours.
• Minor currency pairs with wide swings offer much higher profit potential, although this comes with elevated risks. Consider your risk tolerance to identify currencies that match your volatility sweet spot. 
• Research and learn about the economies, politics, growth potential, and other influences that move the chosen minor currency pair.
• Take advantage of increased volatility by trading minor pairs via CFDs (contracts for difference) as these allow you to tap on trading opportunities in both rising and falling markets.
• Discipline and risk management are crucial when trading minor pairs.
• Start with a demo account to build a trading strategy for minor currency pairs.

To Sum Up

• Minor currency pairs are formed by major currencies except the US dollar.
• Diversifying into minor forex pairs reduces the risk of heightened exposure to the USD.
• Minor pairs are affected by central bank accouchements, economic events, and the geopolitical atmosphere.
• Some popular minor currency pairs to trade are EUR/GBP, EUR/JPY, CHF/CAD, and AUD/JPY.

Disclaimer:

All data, information and materials are published and provided “as is” solely for informational purposes only, and is not intended nor should be considered, in any way, as investment advice, recommendations, and/or suggestions for performing any actions with financial instruments. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation or needs, and hence does not constitute as an advice or a recommendation with respect to any investment product. All investors should seek advice from certified financial advisors based on their unique situation before making any investment decisions in accordance to their personal risk appetite. Blackwell Global endeavours to ensure that the information provided is complete and correct, but make no representation as to the actuality, accuracy or completeness of the information. Information, data and opinions may change without notice and Blackwell Global is not obliged to update on the changes. The opinions and views expressed are solely those of the authors and analysts and do not necessarily represent that of Blackwell Global or its management, shareholders, and affiliates. Any projections or views of the market provided may not prove to be accurate. Past performance is not necessarily an indicative of future performance. Blackwell Global assumes no liability for any loss arising directly or indirectly from use of or reliance on such information here in contained. Reproduction of this information, in whole or in part, is not permitted.