Minor currency pairs

A tier, not a category 

The currency market sorts its pairs by how heavily they are dealt, and the sorting has three loose tiers with no formal boundary between them. At the top are the majors, the seven pairs setting the US dollar against the other most heavily dealt currencies. Below them sit the minors: pairs in which one leg is still a heavily dealt currency, usually the dollar or the euro, and the other is the currency of a smaller developed economy or of an economy whose exchange rate is closely managed. Below those again sit the exotics, where one leg belongs to an emerging economy.

The term is doing a comparative job rather than a definitional one, and that is why no two institutions produce quite the same list. A pair that one desk calls a minor another calls an exotic, and a third avoids the question by naming only two tiers. What every version of the taxonomy agrees on is the direction: further down the list means fewer institutions quoting the pair, less size available at each price, and a wider distance between the price at which the pair can be bought and the price at which it can be sold.

Which currencies fall into the tier 

Three families account for most of what is conventionally called a minor.

• The Nordic currencies. USD/SEK is the dollar against the Swedish krona, USD/NOK the dollar against the Norwegian krone, and USD/DKK the dollar against the Danish krone. All three are issued by open, high-income economies with credible institutions, and all three are dealt far less heavily than the majors. The krone carries an additional sensitivity to crude oil, since Norway is a substantial exporter of it, and the Danish krone is held within a narrow band against the euro by policy, which makes it behave far more like the euro than like its Nordic neighbours.
• The Asian financial-centre currencies. USD/SGD is the dollar against the Singapore dollar and USD/HKD the dollar against the Hong Kong dollar. Both are issued by economies whose monetary authorities manage the exchange rate directly rather than setting a policy interest rate in the conventional way, and the management regime is the single most important thing to know about either pair.
• The offshore Chinese yuan. USD/CNH is the dollar against the yuan traded outside mainland China. It is a distinct market from the onshore rate, which is managed within a band around a daily reference rate, and the two can trade at different levels.

A separate reading of the term treats any pair not involving the dollar as a minor, so that EUR/GBP and EUR/JPY are called minors rather than crosses. That usage is common and not wrong, but it collapses two different distinctions into one word. Turnover tier and the presence or absence of a dollar leg are independent facts about a pair, and pairs are more usefully described by both. What a pair with no dollar leg has in common structurally is covered in currency crosses.

How the tier behaves 

The practical difference between a major and a minor is depth, and depth shows up in three places. The distance between the bid and the offer is wider, because a quoting institution carrying inventory in a less heavily dealt currency needs more compensation for the risk of holding it. The size available at any one price is smaller, so a given order consumes more of the book and finishes at a worse average price than the same order in a major. And the hours in which the pair is well quoted are narrower, because the institutions that specialise in it are concentrated in one region.

That third point is the one most easily missed. A minor is quoted through the whole trading week, so a screen shows a price at any hour. What the screen does not show is how much of that price is real. USD/SGD and USD/HKD are most heavily dealt during the Asian session, USD/SEK and USD/NOK during the European session. Outside those windows the price on the screen is a genuine price backed by materially less size.

A second behavioural feature follows from the management regimes. A currency held inside a band by its monetary authority does not move the way a floating currency moves. It can sit almost still for long periods, since the authority is actively resisting movement, and then move sharply when the band itself is adjusted or when the authority stops defending a level. Quiet is not the same as stable, and a long stretch of very small movements says something about policy rather than about the underlying economy.

Quoting conventions and the cost of dealing 

Most minors are quoted to four decimal places, with the fourth being the pip, on the same convention the majors use. The exceptions are driven by the unit value of the currency: a currency worth a small fraction of a dollar is quoted with more decimals, and one worth several dollars with fewer, so the decimal count follows arithmetic rather than status. Each instrument's own quoting convention and contract size are published in its specifications rather than inferred from its tier.

The cost of dealing in a minor is conventionally read as the sum of two things: the quoted spread, which is visible before a transaction, and the difference between the expected price and the achieved price, which is only visible afterwards. The second is a function of depth. In a heavily dealt pair the two are close together for ordinary sizes. In a less heavily dealt pair they separate, and they separate most in exactly the conditions that also widen the first.

The arithmetic is the whole point of the tier. Nothing about the second book is unusual or improper; it simply contains less size, and the same order therefore reaches further into it. This is why the cost of dealing in a pair cannot be read off its quoted spread alone.

Where the tier stops being a useful guide 

Two situations make the label misleading. The first is a scheduled event specific to the smaller economy, such as a rate decision or an inflation release from its central bank. On that day the pair is not behaving like a second-tier instrument at all: it is the instrument the event is about, and it can carry more movement than any major.

The second is a change of regime. A currency managed within a band is a quiet instrument for as long as the band holds, and the historical record contains several occasions on which a band was abandoned without notice and the currency repriced by more in one session than it had moved in the preceding year. Neither situation is predictable from the tier a pair belongs to, which is the limit of what the taxonomy can tell anyone.