Forex Market Turnover and Major Currencies

Published by Filipe R. Costa on Thu, 02/06/2011 - 14:18
forex trading

Currency exchange is amongst the most liquid and most transparent markets making it a top preference of traders.

To trade foreign exchange or FOREX, there are at least three ways for a retail investor: using futures, through margined forex accounts (CFDs), or by spread betting.

Spread betting is the easiest to understand, the most transparent, and the best for position sizing. Futures usually require large contracts and trading is available in lots. Margined accounts, the most popular way of trading outside the UK, also require trading lots although with the advent of mini accounts there is some flexibility. Spread betting allows you to trade £1 or even less per point. At the same time many providers allow you to bet to decimal places, for example £1.3. That gives you extra flexibility for correctly sizing your positions.

In order to give you an idea of the Forex market dimension, let’s start by saying that this market has a turnover of $3,981 billions per year. That is more than the $2.3 billion UK GDP and equivalent to the annual traded value in the Tokyo Stock Exchange.

In terms of currencies, you already figured it out. The US dollar is the major and most traded currency. It is present in almost half of currency transactions, followed by the Euro. The pound is forth in the list. The table below shows the ten top currencies in terms of turnover. The total for all currencies is 200% because in each transaction there are two currencies involved. The data was taken from the Bank of International Settlements and refers to 2010.

FOREX Turnover Distribution By Currency
Percentage shares of average daily turnover in April
Pos. Currency Perc.
1 US dollar 84.9
2 Euro 39.1
3 Japanese yen 19.0
4 Pound sterling 12.9
5 Australian dollar 7.6
6 Swiss franc 6.4
7 Canadian dollar 5.3
8 Hong Kong dollar 2.4
9 Swedish krona 2.2
10 New Zealand dollar 1.6
  Sum 181.1
  All currencies 200.0

It is no surprise that the US dollar is the top currency since almost all international markets are quoted in that currency and it is the most used means of payment. The difference to the Euro is huge, that in turn, is two times more present in transactions than the third currency – the Japanese yen. The pound is still one important unit that is above the commodity currencies, Australian and Canadian dollars, and the safe heaven Swissy. The Hong Kong Dollar has been gaining some importance in latest years. The seven currencies in the top are responsible for most of the action, and you will find all crosses and pairs that result from pairing them in your spread betting provider.

Let’s now look into turnover by currency pair to better know what we can trade, and where the action is.

Forex Turnover by Currency Pair
Daily averages in April, in billions of US dollars and percentages
Pos. Currency Pair Amount Perc.
1 USD/EUR 1,101 28
2 USD/JPY 568 14
3 USD/GBP 360 9
4 USD/AUD 249 6
5 USD/CAD 182 5
6 USD/CHF 168 4
7 EUR/JPY 111 3
8 EUR/GBP 109 3
9 USD/HKD 85 2
10 EUR/CHF 72 2
  Sum 3,004 75
  All currency pairs 3,981 100

The ten pairs listed are responsible for 3/4 of all Forex transactions and are all you need to get exposure to anything worth it. The USD is present in six of the ten. USD/EUR is the most traded pair since it represents the exchange rate between the two largest economic blocs in the World. The Japanese yen is next in the list against the USD. The yen was always an important currency and is usually used in carry trades to fund portfolio managers. Cable is third in the list and then we have two commodity pairs. The Aussie tracks gold and the Loonie tracks crude oil. The USD/CHF pair has been gaining importance lately because investors seem to prefer the Swissy against the USD in unstable times.

The last table I will present here reports transactions by country. Many of you may be thinking that the US is the country where most currency trading occurs. Not at all! Look at the table.

FOREX Transactions By Country
Daily averages in April, in billions of US dollars and percentages
Pos. Country Amount Perc.
1 United Kingdom 1,853.6 36.7
2 United States 904.4 17.9
3 Japan 312.3 6.2
4 Singapore 266.0 5.3
5 Switzerland 262.6 5.2
6 Hong Kong SAR 237.6 4.7
7 Australia 192.1 3.8
8 France 151.6 3.0
9 Denmark 120.5 2.4
10 Germany 108.6 2.1
  Sum 4,409.1 87.2
  Total 5,056.3 100.0

The UK is by far the most important country responsible by 36.7% of all Forex transactions. It is followed by the US, but notice the big difference. The third one would be the Euro-zone but the table details by country.

Financial spread betting providers offer many markets regarding currency trading. They usual organise their offer in major, minor and other currencies. As we have seen, most of the action occurs in a few currency pairs that you will find on any decent spread betting provider. The advantage of trading those pairs is in the spread. These have the lowest ones. The following table shows typical spreads found in two top spread betting companies: Capital Spreads and Inter Trader.

Forex Spreads
Pos. Currency Pair Capital Spreads and Inter trader Spread as Perc. Of Bid
1 USD/EUR 1 0.007
2 USD/JPY 1 0.012
3 USD/GBP 2 0.012
4 USD/AUD 1 0.009
5 USD/CAD 4 0.041
6 USD/CHF 4 0.048
7 EUR/JPY 3 0.026
8 EUR/GBP 1 0.011
9 USD/HKD 12 0.100
10 EUR/CHF 4 0.033

The spread on the first four along with the cross EUR/GBP (the Chunnel) have spreads lower than 0.012% at today rates. That is really low and will not interfere with your profits. The other pairs are still low commissioned, with spreads below 0.05%, except for USD/HKD that has 0.1%. This last pair is less traded in spread betting.

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Research & Opinion