Minor Pair

Minor pairs in the foreign exchange market refer to currency pairs that do not involve the U.S. Dollar (USD). These pairs are often referred to as 'cross-currency pairs' or 'crosses'. They are called 'minor' because they are less traded than major pairs, which include the USD. Examples of minor pairs include EUR/GBP, AUD/JPY, and NZD/CHF.

How It Works

Minor pairs work similarly to major pairs, but with a few key differences. They are quoted in terms of one currency unit of the base currency being worth a certain number of units of the quote currency. The base currency is the first currency in the pair, and the quote currency is the second. For instance, in EUR/GBP, the base currency is the Euro (EUR), and the quote currency is the British Pound (GBP).

Unlike major pairs, minor pairs do not have the USD as a base or quote currency. This means that when trading minor pairs, you are exposed to two different currencies' movements, rather than just one against the USD. Additionally, minor pairs typically have wider spreads and lower liquidity than major pairs, which can make them more volatile and risky to trade.

Why It Matters for Traders

Trading minor pairs can offer several advantages to traders:

• Diversification: Incorporating minor pairs into your trading strategy can help diversify your portfolio and reduce your exposure to the USD.
• Opportunity for Profit: The higher volatility of minor pairs can present more opportunities for profit, especially during periods of high market volatility.
• Carry Trading: Due to their higher interest rates, some minor pairs can be used for carry trading strategies, where you borrow a low-interest currency and lend a high-interest currency.

Example

Let's consider the EUR/GBP pair. If you believe that the Euro will strengthen against the British Pound, you might decide to buy EUR/GBP. If the Euro does indeed strengthen, the value of EUR/GBP will increase, and you can sell your position at a profit.

Key Takeaways

• Minor pairs are currency pairs that do not involve the USD.
• They are less traded than major pairs, which can make them more volatile and risky.
• Trading minor pairs can offer opportunities for diversification, profit, and carry trading.
• When trading minor pairs, you are exposed to the movements of two different currencies.