Minor Pairs

Minor Pairs (often called Cross Currency Pairs or 'crosses') are currency pairs traded on the global Foreign Exchange Market (Forex) that do not involve the U.S. Dollar (USD). Instead, they feature other major world currencies pitted against each other, such as the Euro (EUR), the British Pound (GBP), and the Japanese Yen (JPY). Think of the currency market as a league table. The Major Pairs are the superstar teams that always play against the champion (the USD). Minor pairs are the exciting matches between the other top-tier teams in the league. While they don't get as much attention as the majors, the price action in these pairs provides a clearer picture of the relative strength between two economies, without the constant influence of what's happening in the United States. Understanding them is key to a holistic view of the global economic landscape, even if you never intend to trade them directly.

While they involve major global currencies, minor pairs behave quite differently from their USD-based cousins. Their unique characteristics create a distinct environment of risks and opportunities.

• Lower Liquidity: Simply put, fewer people are trading minor pairs at any given moment compared to, say, the EUR/USD. This lower trading volume means that it can sometimes be slightly harder to buy or sell large amounts without affecting the price.
• Wider Spreads: A direct consequence of lower liquidity is a wider spread—the difference between the buying price and the selling price. This acts as a higher transaction cost, which can eat into the profits of short-term traders. It's like a toll on a less-traveled road; because there's less traffic, the toll for each car is a bit higher.
• Higher Volatility: With fewer participants, it takes less trading volume to move prices, making minor pairs more prone to sharp and sudden swings. This heightened volatility can be a double-edged sword, offering the potential for quick profits to speculators but also presenting significantly higher risk.

Minor pairs are typically grouped by the main currency in the pair (excluding the JPY, which often acts as the “quote” currency).

• Euro Crosses: These pairs measure the Euro's strength against other major currencies.
  • EUR/GBP (Euro vs. British Pound)
  • EUR/AUD (Euro vs. Australian Dollar (AUD))
  • EUR/CHF (Euro vs. Swiss Franc (CHF))
  • EUR/CAD (Euro vs. Canadian Dollar (CAD))
• Yen Crosses: Famous for their volatility, these pairs are popular with seasoned traders.
  • EUR/JPY (Euro vs. Japanese Yen)
  • GBP/JPY (British Pound vs. Japanese Yen)
  • AUD/JPY (Australian Dollar vs. Japanese Yen)
• Pound Crosses: These pairs reflect the economic health of the UK relative to other commonwealth and European nations.
  • GBP/AUD (British Pound vs. Australian Dollar)
  • GBP/CAD (British Pound vs. Canadian Dollar)
  • GBP/CHF (British Pound vs. Swiss Franc)

There are also other crosses, such as AUD/CAD, AUD/NZD (involving the New Zealand Dollar (NZD)), and CAD/CHF.

If minor pairs are riskier and more expensive to trade, why are they so popular? The answer lies in finding clearer trends and unique opportunities that aren't directly tied to the U.S. dollar. For example, imagine the economy of the Eurozone is booming, while the UK's economy is facing headwinds. A trader wanting to act on this divergence might find the EUR/GBP pair offers a “purer” expression of this trend than either EUR/USD or GBP/USD, both of which would be heavily influenced by U.S. economic data. Furthermore, strategies like the Carry Trade, which profits from Interest Rate Differentials between two countries, can often be more pronounced and stable in certain minor pairs. This allows speculators using high leverage to target specific economic mismatches.

Let's be perfectly clear: actively trading minor pairs is speculation, not investing. It's a high-risk, short-term game of predicting price movements, which is the philosophical opposite of value investing's long-term focus on owning wonderful, productive businesses. The forex market is not a place to “invest” your savings; it's a place to understand global capital flows. So, why should a value investor care about EUR/GBP or AUD/JPY?

1. Understanding Your Companies: Many great companies are multinational. A European value investor holding shares in a UK-based company with significant sales in Europe must understand the dynamics of the EUR/GBP pair. A sustained fall in the pound against the euro could inflate the company's euro-denominated revenues when converted back to pounds, potentially boosting its stock price. This currency movement is a fundamental factor affecting the company's earnings and, therefore, its intrinsic value. It's not about betting on the currency but about understanding all the variables that impact your investment.
2. Global Economic Awareness: The relationships between these currencies tell a story. Is capital flowing from Japan to Australia (driving up the AUD/JPY)? This could signal investor confidence in Australian industry or commodities. These flows provide a real-time report on the global economic mood, which is valuable context for any long-term investor.

For the value investor, minor pairs are not a trading ticket but a tool for deeper analysis and risk management. They offer a window into the health of global economies and the specific currency risks embedded within your portfolio of stocks. Leave the frantic trading to the speculators; your job is to use the information to make smarter, long-term decisions.