What are G10 forex currencies?

G10 forex currencies are ten of the world’s most heavily traded currencies. They are also the world’s ten most liquid currencies. Traders buy these currencies in an open market with minimal impact on their own international currencies.

In this article, we’ll discuss what the G10 are, and the factors that can impact their exchange rates.

The most liquid currencies in the world 

The G10 currencies refer to the most liquid currencies in the world, also known as the majors. These are made up of:

United States dollar (USD)

Euro (EUR)

Pound sterling (GBP)

Japanese yen (JPY)

Australian dollar (AUD)

New Zealand dollar (NZD)

Canadian dollar (CAD)

Swiss franc (CHF)

Norwegian krone (NOK)

Swedish krona (SEK)

The exact origin of the term G10 remains unclear. Some link it to the original G10 countries. These were advanced economies that agreed to take part in the IMF’s General Arrangements to Borrow (GAB).

However, there is no longer a complete match between the G10 currencies and the G10 countries.

The G10 countries include Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.

Belgium, France, Germany, Italy, and the Netherlands are EU members and use the euro. These countries are represented by a single entry in the G10 currencies list.

This means there is space for other widely traded currencies in the G10 group. Examples include the Australian dollar, the New Zealand dollar, and the Norwegian krone.

History of G10

G10 began when the 10 richest IMF members agreed to join the General Arrangements to Borrow (GAB). As of December 2018, this is no longer available.

The GAB was established in 1962. That year, eight IMF member governments joined with Germany and Sweden’s central banks. Together, they decided to provide resources to the IMF.

These resources were intended for both IMF members, and in certain cases, non-members.

In 1964, Switzerland joined the GAB even though it was not an IMF member at the time, further strengthening the agreement.

The impact of the forex markets on G10 currency pairs

Forex market volatility can create both opportunities and risk for traders. Understanding what moves forex markets can help traders forecast future price movements of their preferred currency pair.

Let’s look at the main factors that influence G10 currency price movements.

Commodity prices

Traders link some G10 currencies to the price movements of commodities. This correlation is because certain economies depend heavily on commodity exports or imports. This makes their currencies sensitive to price fluctuations in global markets.

For instance, traders see the Australian dollar as positively correlated with gold and copper prices. As Australia is one of the world’s largest gold producers and one of the top copper producers, changes in the demand for gold or copper can impact its economy and currency.

Similarly, traders tie the Canadian dollar closely to oil since Canada is a net oil exporter. Therefore, a drop in the price of oil will often negatively impact the Canadian economy, weaking the Canadian dollar.

The Japanese yen is influenced by oil prices since Japan is a net importer. This means that Japan’s economy would benefit from lower oil prices.

In addition, since China is one of the world’s biggest importers and an economic superpower, its economic activity influences many commodity prices, even though it is classified among the emerging market (EM) currencies. When China’s economy improves, there is an increased demand for commodities.

This can lead to the currencies of exporting countries, like Australia and Canada, appreciating relative to other currencies. If China’s economy slows down, commodity demand decreases. G10 linked to commodities are often most negatively impacted.

Central banks

A country’s central bank sets its base interest rate, and their decisions usually lead to large movements in currency prices. By understanding future rate hikes or decreases, traders can forecast the possible direction of a currency pair.

Investors interpret a central bank’s increase in interest rates as an indication that the country’s economy will grow and the value of the currency will increase. For instance, between 2002 and 2005 New Zealand’s central bank increased its interest rate, while Japan kept its interest rates low. This caused the NZD/JPY currency pair to rally, as New Zealand became more attractive to investors.

Any increases in interest rates by the US Federal Reserve will affect dollar crosses because the US dollar is the most traded in the world. The two G10 that have historically been most sensitive to increases in US interest rates are sterling and the euro.

Economic data releases

Macroeconomic data releases are an indicator of how well an economy is performing and provide markets with confidence in the country’s confidence. For example, in 2017 the euro was one of the best performing G10 , driven by strong growth and the eurozone’s lowest unemployment rate since the financial crisis in 2008.

Other G10 currencies experience similar levels of volatility due to domestic data releases. Norwegian inflation reports have caused large moves in the Norwegian krone (NOK), while Australian GDP and employment data have triggered larger moves in the Australian dollar (AUD) than some US data releases have caused in the US dollar (USD).

Economic data releases from major G10 currency countries can impact price movement across other G10 but also emerging market (EM) currencies. For example, the US non-farm payrolls (NFP) data release often triggers immediate price movements to G10 currency pairs, such as EUR/USD.

Political uncertainty

Some G10 currencies have experienced volatility in their respective countries. Forex is traded in pairs, so traders calculate a currency’s value relative to another currency. This means it’s important to consider the political outlook of both countries in a pair.

For example, Brexit has had a serious and long-lasting impact on the British pound, making a full recovery unlikely until there is political stability. However, the pound has remained one of the best performing G10 currencies, partly because most if its major partners have also experienced political uncertainty.

The US dollar was one of the weakest G10 currencies in 2018. Despite expectations of interest rate rises and positive economic data, the currency struggled due to Donald Trump’s decisions on US immigration, causing political turmoil. Meanwhile, the euro faced periods of instability due to elections in France and Italy. The weakened US dollar and euro contributed to the British pound’s relative gains.

Economic crisis

Traders link some currencies, like the GBP, to global economic growth historically.

Investors see some G10 currencies as safe-haven assets, so these currencies tend to rise during economic uncertainty. Recessions usually impact most currencies, so investors turn to safe-haven currencies like the Japanese yen (JPY) and the Swiss franc (CHF).

Due to the stability of the Swiss government and its financial system, there is increased demand for the Swiss franc during recessions, especially as the country is independent from the rest of the EU.

Likewise, investors move towards the Japanese yen, strengthening the currency during economic uncertainty.

Conclusion

The G10 currencies represent the world’s most liquid and widely traded currencies, and play an important role in global forex markets. The value of the G10 is influenced by different factors, like commodity prices, central bank policies, economic data releases, political uncertainty, and global economic conditions. Understanding these factors is important for traders in anticipating price movements and identifying trading opportunities.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.