Major Currency Pairs Traded in South Africa
When selecting the best major currency pairs traded in South Africa for beginners, you get reminded not to trade with multiple currency pairs simultaneously and instead trade with one or two currency pairs. By focusing on not more than two, you will gain knowledge and become successful with trading the major currencies in the long run. Once you become more confident and comfortable, you can increase your trading portfolio.
What is a Currency Pair?
A currency pair is a term that refers to the value of one country’s currency calculated based on another country’s currency. When trading a currency pair, you are buying one currency while simultaneously selling another, intending to profit on the difference. In other words, you’re buying the base currency and selling the quoted currency.
In this example, the base currency will be EUR (the currency you’re buying), and the quote currency is USD (the currency you’re selling).
The bid price indicates the amount of quote currency a trader requires to buy the needed amount of base currency.
Unfortunately, most beginners aren’t aware of choosing the best currency pairs with which to trade.
Types of Currency Pairs
Currency pairs get divided into three different groups – major, minor, and exotic currency pairs.
The major currency pairs traded in South Africa is as follows:
- USDZAR – United States Dollar vs. South African Rand
- EURUSD – Euro vs. United States Dollar
- GBPUSD – Great Britain Pound vs. United States Dollar
- USDCHF – United States Dollar vs.
- USDJPY – United States Dollar vs. Japanese Yen
- AUDUSD – Australian Dollar vs. United States Dollar
You’ll notice that all the major currency pairs have the United States Dollar on one side. This is because the American Dollar is the leading currency globally and gets used in roughly 88% of currency trades.
The major currencies get traded throughout the day with narrow spreads with highly volatile markets. They are also the best currency pairs to trade for beginners, representing the most robust economies globally.
The minors, also known as cross-currency pairs, are other currencies that have no connection to the US Dollar, even if they’re popular. Compared to the major currencies, they have slightly wider spreads and have lower volatile markets. Minor currencies are also not as actively traded due to low trading volumes.
Examples of minor currencies include GBP/JPY, EUR/AUD, and EUR/GBP. Having the EUR on any side of a pair will add liquidity and stability to any chosen instrument.
Pairs that are from emerging or developing markets are known as exotic currency pairs. They have markets that aren’t as liquid, have high volatility, and relatively larger spreads and risks.
Exotic currency pairs are unstable and unpredictable, as each pair includes an emerging country’s currency. Avoid exotic currencies if you’re afraid of extreme liquidity and wide spreads. Instead, consider starting with major and minor currencies as they’re more stable.
One instance of an exotic pair is the USD vs. Singapore Dollar (USD/SGD).
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The United States Dollar (USD)
Because the major currency pairs traded in South Africa all involve the US Dollar, we will look at why this currency is important.
The US$ gets referred to as the colloquial buck and is the currency of the United States and its territories. Other countries’ financial press refer to the US Dollar as “greenback,” referencing the green colour of their banknotes.
In the forex market, the United States Dollar is involved in more than half the trades. Governments hold onto the US Dollar as the currency is strong and buy currencies from their international exchanges.
The United States holds confidence and trust globally due to its capacity to pay its debts. Because of this, the USD keeps its position as the world’s strongest currency and will continue to reign in the coming years.
USD/ZAR – United States Dollar vs. South African Rand
One of the most traded currencies throughout Africa is the South African Rand. The South African Rand gets traded due to its volatility and has become preferred amongst traders.
The South African Rand became a currency after moving away from the Pound in 1961. The Rand held steady until apartheid ended in 1994. Since then, it’s weakened tremendously over the years, especially due to Eskom not keeping up with the country’s energy demands and negative politics, such as when then-president Jacob Zuma fired the finance minister in late 2013.
In September 2017, Goldman Sacks declared that state-owned Eskom Holdings was the most significant risk to South Africa’s economy, mainly due to its debt and corruption. This was also partly because Eskom had no permanent CEO at the time.
ZAR vs. the price of gold
In its early days, the Rand’s value got linked to the price of gold, which is South Africa’s main export. During the financial crisis of 2008, the Rand plunged and suffered, so investors chose to invest in currencies like the Japanese Yen and the US Dollar. Against the US Dollar, the Rand, unfortunately, fell by nearly 50% in 12 months.
Because South Africa’s economy relies so much on its gold exports, the Rand can get linked to gold prices. Yet, the Rand remains unstable and fragile and heavily relies on the uncertainties of the world.
As of April 7, 2021, the Dollar ZAR average daily trading volume YTD was 135,450.
EUR/USD – Euro vs. United States Dollar
The USD/EUR currency pair is widely known as “The Channel.” Amongst the currency majors, the EUR/USD pair is the group leader, being the most traded currency pair globally. This pair represents the world’s two largest economies, having faced the most volatility since the Euro got established in 1999.
The USD/EUR currency pair comprises over one-third of Forex’s overall amount of transactions. This is because of the transparency, predictability, and size of both the US and EU economies.
The Euro gets managed by the Eurosystem and the European Central Bank. Not all nations of the Euro are members of the EU, such as Denmark.
This currency pair offers high liquidity and tight spreads consistently. This attracts traders as they can make large trades with fewer impacts on the market.
What drives their prices?
A rule of thumb is that there will be a significant impact on the Euro according to the larger size of a country’s GDP within the Eurozone. Because of this, the Euro’s volatility can get impacted by situations such as the United Kingdom’s Brexit.
On the other hand, the Euro can also get affected by smaller countries, especially when a region’s economic stability is threatened and causes a ripple effect. Other important data that can drive prices include:
- GDP growth
- Interest rates that get set by the US Federal Reserve (Fed) and the European Central Bank (ECB)
- Trade balance data
There will be a higher demand for the currency with the Fed and ECB’s higher interest rates, as there’s a better return on their original investment. For example, if the ECB sets interest rates higher than the Fed, the Euro would likely appreciate compared to the US Dollar.
The USD can get influenced by inflation data and GDP, unemployment levels, and interest rates.
This major currency pair traded in South Africa is the best to trade if you’re new to forex trading.
GBP/USD – Great Britain Pound vs. United States Dollar
The currency pair GBPUSD is one of the oldest currency pairs traded. Also known as “The Cable,” it gets used to explain the British Pound Sterling vs. the US Dollar. The first exchange rate occurred between the British Pound and the US Dollar in July 1866 and got transmitted between the New York Stock Exchange (NYSE) and London Exchange.
The USD/GBP got its name “The Cable” when a communications cable situated under the Atlantic Ocean got used to coordinate the currency pair between the New York and London markets. Today, Transatlantic communications get handled by optic fiber cables, along with satellites.
The strength of this currency pair is due to the strength of both the British and American economies. The Pound will therefore strengthen against the US Dollar if the British economy sees faster growth rates. In contrast, the American Dollar will strengthen against the Pound if the American economy has faster growth rates.
What drives their prices?
The USD/GBP pair’s quote price is affected by the Fed and the Bank of England (BoE). Therefore, the difference between the Pound and Dollar’s interest rates can affect the currency pair’s price.
The GBP/USD currency pair can be a risk for beginner traders, even though it’s popular among most traders. The currency pair has uncertain prices with a high degree of volatility and can produce profitable pips.
Most professional traders trade this pair with their focus on aggressive short-term strategies.
USD/CHF – United States Dollar vs. Confoederatio Helvetica Franc (Swiss Franc)
The USD/CHF currency pair is also referred to as “The Swissie,” with the Swiss Franc being the last issued Franc in Europe. Switzerland has long been a neutral country, with a banking centre available to customers worldwide.
Swiss banks offer secrecy and a haven to investors, making them attractive locations for hoarding cash. The Swiss banking system has played a role in strengthening the Swiss Franc, thereby putting pressure on its exporters.
When volatility increases in the market, traders usually turn to CHF, but the opposite happens when the market is stable. Thus, it doesn’t get traded as actively as others during these times.
The CHF/USD currency pair price will drop during increased volatility when CHF gains strength against the USD and investments increase.
Why Switzerland doesn’t use the Euro as its currency
European Union (EU) members may surround Switzerland, but this doesn’t mean that they are part of the EU or use the Euro currency. In 1992, Switzerland’s citizens voted not to join the EU, although they allow EU citizens to remain interdependent while moving freely.
The Euro is foreign money to the Swiss, as their national currency is the Franc. According to the exchange rate of that day, visitors to the country can exchange currency in Euros but will receive change in Swiss Francs.
Is the Swiss Franc classified as a good investment?
Investments get classified as good according to what the individual investor considers them to be. Because the Swiss National Bank controls and regulates the Franc’s value, it gets regarded as a stable currency.
There is also transparency within the country’s adequately regulated financial markets, making them an excellent investment to some individuals.
USD/JPY – United States Dollar vs. Japanese Yen
The USGJPY is also referred to as trading the “gopher” and is the second most traded pair globally. When comparing the value of these two currencies, they are affected by the difference between the Bank of Japan’s interest rates and the Federal Reserve.
Because the Yen is the most traded currency in Asia and the US Dollar is the most traded currency globally, this strong major currency pair has high liquidity. The pair is also widely known for its predictability and low spreads compared to other currencies.
Relative to the US Dollar, the Yen’s value is affected by the Bank of Japan (BoJ), as they establish the Japanese economy’s interest rates.
The Bank of Japan has been keeping interest rates low since the 1990s to stimulate economic growth. Short-term lending rates fell between 1993 and 2008 due to them reacting to this relaxation. The combination of the Yen’s liquidity and low interest rates encouraged investors to invest money borrowed in Japan into other countries. This is also known as a carry trade.
The Dollar/Yen is not recommended for beginner traders but rather for experienced traders due to the pair’s high volatility.
AUD/USD – Australian Dollar vs. United States Dollar
Australia’s currency is the Australian Dollar (previously the Australian Pound). It is the currency for various external territories, such as Norfolk Island, Cocos Islands, and Christmas Island, to name a few. To distinguish the currency from other dollar currencies, you will see it characterized by the symbols A$ or AU$.
Originating in February 1966, the Australian Dollar became the fifth most traded currency globally in 2016. During this period, they accounted for 6.9% of the world’s daily share, following closely behind the American Dollar.
The Australian Dollar is popular among traders for the following reasons:
- Australia’s high interest rates
- The foreign exchange market is free from government intervention
- The political system and economy of Australia that is generally stable
- The diversification benefits offered by the Australian Dollar due to its exposure to Asian economies
What drives their prices?
The USD/AUD currency pair has lower liquidity, with them also getting referred to as commodity currency pairs. This is due to oil and gold prices being in close ties with them. Being a significant producer of gold, Australia relies heavily on gold prices.
The AUD/USD pair also gets referred to as “The Aussie.” The Australian Dollar gets its value from its exports, such as minerals and metal, making a large part of Australia’s GDP. The AU Dollar will likely depreciate if there was a decline in these commodities in the global market. Should this happen, there will be an appreciation in the US Dollar, therefore costing less US Dollars when purchasing one Australian Dollar.
The AUD also gets affected by the differences in interest rates between the US Federal Reserve and the Reserve Bank of Australia (RBA). It would cost more USD to buy one AU Dollar if American interest rates get low, and the US Dollar will then weaken against the AUD.
How to Find the Best Major Currency Pairs Traded in South Africa
The best major currency pairs traded in South Africa can get determined by the individual trading experience, and most prefer liquid and stable economies.
When considering a forex pair’s daily traded volume, EUR/USD is the leader. Traders trade for-profit and are aware that other currency pairs are just as viable. Look for different currency pairs that have high liquidity.
When choosing a currency pair, consider the trading session’s trading hours. Asia, the United States, and Europe are the major market centers where time zones play an essential role to traders.
Ensure you consider the market’s opening and closing hours and their locations.
Currency Pairs – What to Take into Consideration
When looking for the best currency pair to trade with, consider the following factors:
Stick to picking a pair that makes you comfortable while considering your and the currency pair’s best trading time frames. If it’s unfeasible to you, avoid choosing a currency that opens in the middle of the night.
Start with a major currency pair, commit to it for a while, and once you’re knowledgeable, you can start adding more currency pairs to your portfolio.
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