Direct answer: which currencies should you use with forex?
There is no single “right” set of currencies for forex. In the balance of payments and currencies context, the practical way to choose is to select currency pairs whose external economic drivers you can describe and verify—such as the underlying country’s cross-border inflows and outflows (trade in goods and services, income flows, and capital flows). You then compare pairs using stable criteria like pair structure (two-way exchange), liquidity, and how consistently available public data explains currency movements.
A useful baseline is to work with major, widely quoted currency pairs and to avoid treating any currency pair as guaranteed to behave a certain way. If your goal is understanding, not trading, your currency “choice” is really about selecting which drivers and data series you want to focus on.
How it works: mapping currencies to balance of payments drivers
Forex prices reflect exchange rates between two currencies. When you analyze a currency pair, you are implicitly analyzing two sets of cross-border financial relationships, because the pair moves with relative conditions in each country.
In the balance of payments framing, consider three categories of external flows:
- Current account flows (goods and services, plus income). These help describe whether a country is a net borrower or net lender in its everyday economic interactions.
- Capital and financial account flows (investments and financing). These help describe how international money moves into or out of the country.
- Expectations and risk sentiment. Even with stable fundamentals, investors can reprice risk, affecting demand for currencies.
So, “which currencies” becomes a question of which two currencies (and therefore which two economies) you can most clearly connect to external flows, and whether the market for that pair provides sufficiently consistent price observation.
Example checks and comparison criteria
Use the same criteria for any potential pair. For each candidate pair, check:
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Pair visibility and liquidity (practical tradability of information) Some currencies are more consistently quoted and observed than others. Higher quoting depth typically makes it easier to validate what the market is doing. This is not a promise of easier results; it is about measurement quality.
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Data availability for external flows If you can find regular, comparable information about trade, income, and cross-border financing, then the pair is easier to analyze through balance of payments concepts.
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Relative stability of the driver story A currency pair is more interpretable when the same broad external narrative can be traced over time (for example, persistent changes in net external financing). If drivers appear to be dominated by sudden, non-fundamental repricing, the “currency fundamentals” explanation becomes weaker.
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Both currencies matter Avoid focusing only on one side. A pair can move because one country’s external position changes, or because the other country’s position changes, or both.
Limitations and risks you should assume from the start
- No guaranteed behavior. Currency movements are affected by many factors, and balance of payments explanations may not uniquely determine short-term price changes.
- Uncertainty and regime changes. The relationship between external flows and currency demand can shift when markets change risk appetite or when financing channels evolve.
- No inference about future outcomes. Even if a pair’s recent movement aligns with an external-flow narrative, you cannot reliably infer future direction from that alignment alone.
- Understand what you can verify. The safest conclusion is often conceptual: you can explain drivers and measurement, but you cannot remove forecast uncertainty.
If you want, you can apply the checks above to any currency pairs you are considering and document which external-flow concepts you can verify for each currency.