Best Currency Pair to Trade

What is the best currency pair to trade in the coming year? This is strictly an issue for currency speculators as companies doing business internationally trade the currencies that they have to in order to hedge risk. Because currency speculators trade in order to make money instead of losing it, the best currency pair to trade should be most profitable and/or most secure. Currency traders typically look for high volume and high liquidity as these factors make technical analysis more accurate. Currency speculators also try to scout out the most volatile currency pair to trade as profits come from changes in currency values. Fundamentals such as employment, balance of payments, flow of investment capital, central bank monetary policy, and national politics all play roles in determining currency value. In order to trade profitably traders need to keep tabs on these factors for both currencies. This brings up an issue of practicality. If the trader keeps jumping from one currency to another in search of the best currency pair to trade, he increases the amount of work he needs to do in analyzing currency fundamentals.

The US Dollar as Half of the Best Currency Pair to Trade

With this last issue in mind, remember that roughly 85% of currency trades involve the US dollar. In fact, many minor currencies only trade against the US dollar or the other major currencies. If you want to trade one minor against another you commonly need to trade the first against the US dollar and then the US dollar against the second currency. By always using the US dollar as one currency the trader only needs to learn the fundamentals of the other currency in order to trade the pair rationally. By trading the US dollar as the first half of the currency pair the trader is typically guaranteed a reasonable degree of liquidity and volume. The best currency pair to trade will commonly include the greenback.

Diverging Currencies Lead to Profits

The US economy is ever so slowly recovering from the recession. Although its progress is not spectacular it has outperformed Europe and most of the developing world in the last year. An ideal situation for the currency trader will be to pick an economy likely to fall a bit as the US economy rises. There are indications that both India and China are likely to experience economic setbacks, especially if Europe goes into a recession. Russia has seen huge capital outflows as investors are worried about ongoing political drama. Brazil has been a growing South American powerhouse but may have to retrench a bit if commodity orders from China fall off. Any economy that ever so temporarily suffers setbacks will see its currency fall. If the dollar remains relatively stable or improves it could see gains against any or all of the currencies of the nations just mentioned. If the commonly expected recession hits Europe this year, coupled with severe austerity measures to deal with the various sovereign debt dilemmas, it could be a good trade against the dollar. The EUR USD could, in fact, be the best currency pair to trade as the recurring pronouncements of European bankers and leaders have tended to force the currency up and down on a regular basis.

As usual we are not suggesting any specific currency pair to trade but rather offer this discussion as food for thought for traders in shaping their own profitable Forex trading strategy.