Which is the Best Currency Pair to trade on XM's MT4 and MT5?
Which currency pair is the best for trading with XM? Know the characteristics of currency.
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- Which is the Best FX Currency to trade?
- US Dollar – The world’s most popular trading currency
- Euro – The world’s second-highest trading volume
- Japanese Yen – As a “safety asset”
- Great British Pound – The 4th largest trading volume
- Canadian Dollar – Currency of resource country with deep connection to USD
- Australian Dollar – The representative currency of resource countries
- New Zealand Dollar – Linking to Australian and Chinese economies
- Turkish Lira – High interest rate currency
- South African Rand – Easily affected by resource prices
- Mexican Peso – Second largest economy in Latin America
Which is the Best FX Currency to trade?
XM is an online Forex and CFD broker, and offers over 1000 financial instruments to trade on their trading platforms.
Among various products, the most popular and traded ones is the “Forex currency pairs”.
While Forex market is known as the largest financial market in the world, it is also the most traded market on XM MT4 and MT5.
Trading Forex currency pairs give you various advantages that other markets cannot give, such as high leverage up to 1:1000, tight spread from 0.0 pips, low trading commission and also deep liquidity which secures high quality order execution with less slippage.
Now you know that Forex currency pairs are very popular, but do you know which currency is the best for trading with XM?
This fully depends on your knowledge, the country residence and the type of information that you can reach out daily.
Each currency has different characteristic and you must know not only the trend, but also how the currency price is affected and from where.
For traders who haven’t decided which currency pair to trade, we have summarized the characteristic of major, minor and exotic currencies below.
1. US Dollar – The world’s most popular trading currency
The US dollar, which is the world’s largest key currency, is used not only in the United States, but also for trade and international financial transactions.
The United States is expected to continue to grow in its young population and has high growth potential.
There is also an improving trend in the “twin deficits (financial deficits and current account deficits)” that they once suffered from.
In particular, the current account deficit is expected to improve in the future due to the dramatic increase in domestic energy production due to the shale revolution.
No country (or region) replaces the United States, with the Eurozone struggling with its own problems, and the US dollar continues to play a central role in the exchange market.
Therefore, it should be noted that the quoted material for the US dollar is important for all currencies.
Due to the high liquidity of the US dollar and the high volume of transactions, the market fluctuations are relatively small.
In the case of investors avoiding risk and transferring funds to safe assets, as in the past when there was the word “emergency dollar buying”, so-called risk-off phase, the US dollar tends to be second currency following the Japanese yen.
In addition, the US dollar is mainly driven by the market prices of the US, and they can be known relatively easily by news reports, so it may be said that it is an “easy-to-understand currency”.
Monetary policy is the most important factor in looking at the US dollar.
The Federal Reserve, the central bank, holds the FOMC (Federal Open Market Committee) eight times a year to determine monetary policy.
Four of these times (once every two times), FOMC participants’ economic outlook and rough monetary policy outlook are announced.
And most importantly, the employment statistics released on the first Friday of every month.
Unlike other central banks, the Fed is not only about price stability, it is also tasked with maximizing employment.
Therefore, employment statistics have a significant impact on monetary policy in addition to vividly reflecting economic trends.
In addition to employment statistics, there are also important data releases such as retail sales, price statistics, business sentiment index, regional Fed economic report (Beige Book), etc.
In addition, trends in bonds (interest rates) and stock prices are highly linked to the US dollar and have a large impact on the global financial markets, so you may want to check it out.
2. Euro – The world’s second-highest trading volume
The euro is a currency that started trading in January 1999 in accordance with the currency consolidation conducted under the EU (European Union), which was established in November 1993.
The euro as a cash currency was born in January 2002 and has a short history, but it has the second largest trading volume in the world after the US dollar, and has established itself as an international currency.
As of 2020, the euro is used in 19 EU member countries called the “Eurozone” and in 6 non-EU countries, a total of 25 countries.
The advantage of introducing the euro is that it saves time and fees for exchange transactions in the euro area and avoids the risk of currency fluctuations.
On the other hand, the fiscal policies of the euro-participating countries are such that the sovereignty of each country is maintained and countries with strong and weak financial bases are mixed.
When problems in some countries with weak financial bases are highlighted, such as the 2010 European Sovereign Crisis, the common currency, the euro, may fall and other countries may be disadvantaged.
The disadvantage is that a country with a strong financial base needs to help a country with a weak financial base (providing financial support, etc.) to solve the problem.
It is said that such differences in the “household circumstances” of the euro area countries also affect the decision-making of the ECB (European Central Bank) that manages the euro, making it difficult to manage monetary policy flexibly.
The EUR/USD pair, which is the currency pair of the US dollar and the Euro, is the most traded currency pair in the world, and is in a side-to-side relationship with “buy the euro, sell the dollar” or “buy the euro, buy the dollar”.
Therefore, “Euro buying material is USD selling material” and “Euro selling material is USD buying material”.
For example, the Greek financial crisis is “Euro selling material”, while it is “US dollar buying material”.
The Eurozone has deep geographical and economic ties with Russia and the Arab countries, and if there are conflicts or terrorism in those countries, or if there is a growing concern about the economic crisis, there is a geopolitical risk that the euro will be easier to sell.
3. Japanese Yen – As a “safety asset”
What is currently in circulation is the “new Japanese yen” issued after World War II, which was initially set at $1 = 360 yen, and the Nixon Shock of 1971 (the conversion of dollars and gold was suspended).
After 1973, the Japanese yen market moved to a floating exchange rate system, after which the yen generally appreciated and the dollar weakened.
Then in 2011, the yen strengthened and the dollar weakened to the ¥75 level.
However, the rapid depreciation of the Japanese yen is accompanied by the first arrow of the economic policy “Abenomics”, which was launched by the Abe administration in December 2012, which is known as a “daring monetary policy”.
On June 5, 2015, the USD/JPY exchange rate rose to a high of 125.86 Japanese yen since June 2002.
As the Bank of Japan continues to implement unconventional monetary easing, the Japanese yen will be able to earn profits by “selling the borrowed yen at low interest rates and buying foreign currency assets” because the funding cost to borrow the Japanese yen will be low.
It is also the representative currency of the so-called “carry trade”.
Previously, “emergency dollar buying”, which is easy to buy dollars in the case of “emergency” such as war, conflict or financial crisis, was established as a common sense, but recently, “emergency Japanese yen buying” has become popular, and it is seen often.
When the United States becomes a party to or involved in wars or conflicts, or when uncertainty about the monetary policy of the United States increases uncertainty, there is a tendency to avoid the US dollar and buy the Japanese yen as a risk aversion.
Trade Japanese Yen pairs with XM
4. Great British Pound – The 4th largest trading volume
The pound is also used as a currency unit in Egypt, but simply the pound usually means the British pound.
It is also called Sterling Pound.
From the British Empire to just after World War II, it was the key currency of the world, but with the decline of the British economy after that, the position of the key currency was replaced by the US dollar.
Nevertheless, it is traded as the 4th most traded international currency in the world.
In the United Kingdom, which was a member of the EU (European Union), the introduction of the common European currency, the euro, was also considered, but there were many domestic oppositions, and participation in monetary union was postponed.
For this reason, the BOE (Bank of England) issues banknotes and controls the policy interest rate, and has a more flexible monetary policy than the ECB (European Central Bank), which is a collection of central banks in many countries.
The UK decided to Brexit (UK leaving the EU) in a June 2016 referendum.
However, if they agree with the EU on the condition of withdrawal, the transition period will be prolonged until the end of 2020, and major changes will be avoided.
It should be noted that the British pound is less subject to speculation because it has less circulation than the US dollar and the Euro, and the Japanese yen price per unit is also large, so it is said that price movements are likely to become violent.
Trade British Pound pairs with XM
5. Canadian Dollar – Currency of resource country with deep connection to USD
Although Canada is a member of the Commonwealth of the UK, the Canadian dollar behaves similarly to the US dollar because of its close economic ties to the United States.
Canada is also rich in energy and mineral resources such as oil, natural gas and metals, and is also endowed with forest resources.
Therefore, the Canadian dollar has another side, the currency of resource-rich country.
The shale revolution has been a big plus not only in the United States but also in Canada’s crude oil production.
Monetary policy is operated by the Bank of Canada (BOC), which is the central bank.
In terms of monetary policy, the Bank of Canada (BOC) tends to follow the Fed (Federal Reserve Board) a little later because of its high economic ties with the United States.
The Canadian dollar is characterized by being sensitive to the price of crude oil.
When the crude oil price rises, the Canadian dollar tends to rise, and conversely, when the crude oil price falls, the Canadian dollar tends to fall.
Trade Canadian Dollar pairs with XM
6. Australian Dollar – Resource country
Australia has abundant resources such as iron ore and coal, and since mineral resources account for more than 50% of all exports, the Australian dollar (AUD) has the aspect of a resource-based currency.
Australia also has China as its largest trading partner, with over 30% of all exports destined for China.
Therefore, the Australian dollar has the characteristic that it is susceptible to commodity prices such as crude oil, gold and iron ore, and factors in China.
If China’s economic indicators are good, it will be positive for the AUD, and if the economic slowdown is suggested, it will be a negative factor for the AUD.
Other indicators such as CPI, CDP, employment statistics, and retail sales that are subject to the RBA’s inflation target should be kept in mind.
In addition, the Australian dollar itself reacts to Chinese economic indicators, which makes it easy to move during Asia and Oceania time.
The Australian dollar was once regarded as a high interest rate currency, and the policy interest rate was temporarily raised to 7.25% in March 2008, but as of December 2018, the interest rate has fallen to 1.50%.
Nonetheless, Australia is still a popular currency in FX because it has relatively few economic and political uncertainties, active export transactions and abundant natural resources.
Australia has a relatively stable credit rating from three major rating agencies, and it can be said that Australia is in a healthy financial position.
The RBA decision-making meeting is held on the first Tuesday of every month except January.
The RBA has adopted an inflation target and is conducting policy so that the consumer price index (CPI) stays within +2% to +3% over the medium term.
Also, the Australian dollar tends to be affected by market risk-on and risk-off, and it tends to rise when investors strengthen their risk appetite (risk-on), and conversely investors weaken risk appetite (risk off) if the currency is easy to fall.
Other than that, it is necessary to pay attention to the stock market trends of each country and the international situation such as geopolitical risk.
Trade Australian Dollar pairs with XM
7. New Zealand Dollar – Linking to Australian and Chinese economies
The New Zealand economy is highly dependent on trade (exports + imports) which accounts for about 70% of GDP.
The largest export destination changed from Australia to China in 2013, with over 20% of the total exports going to China.
As a result, the New Zealand economy is greatly affected by the trends in the Chinese economy.
Although the NZ dollar is said to be a resource-based currency, it has a slightly different character than the Australian dollar.
New Zealand does not produce resources such as crude oil or minerals.
Dairy farming is the main export industry, and dairy products account for about 30% of all exports.
Therefore, the NZD is more susceptible to prices of agricultural products such as dairy products than crude oil and gold, and it is necessary to pay attention to those trends when looking at the NZD.
Against the backdrop of falling dairy prices, New Zealand has repeatedly cut interest rates since 2015.
The current policy interest rate is 1.75%, suggesting the possibility of further easing.
Another thing that affects the NZD is the RBNZ (Reserve Bank of New Zealand) monetary policy.
RBNZ holds policy meetings eight times a year (every 6 weeks).
The RBNZ has adopted an inflation target and is operating a policy that keeps the consumer price index (CPI) within the range of +1 to +3% in the medium term from the previous year.
Another characteristic of the NZD is that it easily reflects changes in investor risk awareness.
It is important to note that risk-on is a positive factor for the NZ dollar, while risk-on can be a positive factor for the NZ-dollar if the risk turns on due to high stock prices.
Trade New Zealand Dollar pairs with XM
8. Turkish Lira – High interest rate currency
Turkey has a large young population, and the labor force is expected to increase in the future.
It is also an emerging country located geographically across Europe and Asia and adjacent to the Middle East.
Turkey is also known as a pro-country because it is a tourist-oriented country with Istanbul, which blends East and West culture, and Cappadocia, which is famous for its miracle.
The biggest attraction of Turkish lira is the high policy rate.
On the other hand, high policy interest rates are also the flip side of high inflation, which works against Turkish lira in terms of purchasing power parity.
Turkey has a chronic current account deficit and relies on foreign inflows to meet its domestic funding needs.
As a result, market fluctuations tend to increase due to factors affecting global financial flows, such as changes in monetary policy in developed countries.
When investing, it is necessary to pay close attention to the global financial situation as well as Turkey’s economic and political situation.
Trade Turkish Lira pairs with XM
9. South African Rand – Easily affected by resource prices
South Africa is blessed with mineral resources such as gold, diamond and platinum, and is one of the world’s leading mining resource countries.
Therefore, South African Rand is positioned as a resource-rich currency, and is characterized by being susceptible to commodity prices such as gold.
South African Rand is also known as a high interest rate currency.
The central bank, SARB has set an inflation target and is operating policies to keep the consumer price index (CPI) rate of increase over the previous year within +3% to 6%.
Therefore, it is necessary to pay attention to the trend of CPI.
South Africa has a constant current account deficit and relies on foreign countries for financing, which makes it susceptible to global cash movements.
Trade South African Rand pairs with XM
10. Mexican Peso – Second largest economy in Latin America
Mexico is an emerging country with the second largest economy in Latin America after Brazil.
It is rich in mineral resources such as silver, and produces oil and natural gas in the Gulf Coast.
For this reason, the Mexican peso is positioned as the currency of the resource-rich country and is characterized by being easily affected by trends in the price of resources such as crude oil.
Mexico shares a border with the United States and is highly dependent on the United States due to its geographical conditions.
About 80% of Mexico’s total exports are to the United States, and about half of its imports are from the United States (both are on a monetary basis).
As a result, US economic trends are important to the Mexican economy.
In looking at the Mexican peso, we also need to look at the relationship between the United States and Mexico.
If the relationship between the two countries is good, it will be a supportive factor for the Mexican peso, while the deterioration of the relationship will be a negative factor for the Mexican peso.
Mexico’s monetary policy is also important for the Mexican peso.
The BOM (Bank of Mexico) has adopted an inflation target, and the goal of monetary policy management is to increase the CPI (consumer price index) growth rate from the previous year to +3% (1% above and below the allowable range).
In the market, a BOM rate hike (increased observation) can be a factor to increase the Mexican peso, while a rate cut (increased observation) is considered to be a factor to decrease the Mexican peso.
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