[FOREX 101] Currencies come in pairs

To make matters easier, forex markets refer to trading currencies by pairs, with names that combine the two different currencies being traded, or “exchanged,” against each other.

Additionally, forex markets have given most currency pairs nicknames or abbreviations, which reference the pair and not necessarily the individual currencies involved.


Major currency pairs

The major currency pairs all involve the U.S. dollar on one side of the deal. The designations of the major currencies are expressed using International Standardization Organization (ISO) codes for each currency. Table 2-1 lists the most frequently traded currency pairs, what they’re called in conventional terms, and what nicknames the market has given them.

EUR/USD Eurozone*/U.S. Euro-dollar N/A
USD/JPY U.S./Japan Dollar-yen N/A
GBP/USD United Kingdom/U.S. Sterling-dollar Sterling or Cable
USD/CHF U.S./Switzerland Dollar-Swiss Swissy
USD/CAD U.S./Canada Dollar-Canada Loonie
AUD/USD Australia/U.S. Australian-dollar Aussie or Oz
NZD/USD New Zealand/U.S. New Zealand-dollar Kiwi

* The Eurozone is made up of all the countries in the European Union that have adopted the euro as their currency.


Major cross-currency pairs

Although the vast majority of currency trading takes place in the dollar pairs, cross-currency pairs serve as an alternative to always trading the U.S. dollar. A cross-currency pair, or cross or crosses for short, is any currency pair that does not include the U.S. dollar. Cross rates are derived from the respective USD pairs but are quoted independently.

Crosses enable traders to more directly target trades to specific individual currencies to take advantage of news or events.

For example, your analysis may suggest that the Japanese yen has the worst prospects of all the major currencies going forward, based on interest rates or the economic outlook. To take advantage of this, you’d be looking to sell JPY, but against which other currency? You consider the USD, potentially buying USD/JPY (buying USD/selling JPY) but then you conclude that the USD’s prospects are not much better than the JPY’s. Further research on your part may point to another currency that has a much better outlook (such as high or rising interest rates or signs of a strengthening economy), say the

Australian dollar (AUD). In this example, you would then be looking to buy the AUD/JPY cross (buying AUD/selling JPY) to target your view that AUD has the best prospects among major currencies and the JPY the worst.

The most actively traded crosses focus on the three major non-USD currencies (namely EUR, JPY, and GBP) and are referred to as euro crosses, yen crosses, and sterling crosses. Table 2-2 highlights the most actively traded cross currency pairs.

EUR/CHF Eurozone/Switzerland Euro-Swiss
EUR/GBP Eurozone/United Kingdom Euro-sterling
EUR/JPY Eurozone/Japan Euro-yen
GBP/JPY United Kingdom/Japan Sterling-yen
AUD/JPY Australia/Japan Aussie-yen
NZD/JPY New Zealand/Japan Kiwi-yen