Forex currency pair symbols are always three letters, where the first two letters serve the purpose of identifying the name of the country and the third letter identifies the name of that country’s currency. Despite the fact that there have been many press reports recently about the US Dollar losing its status, there is little doubt that at this time and most likely for the foreseeable future, the US Dollar is still the reigning currency over all the other currencies of the world. The most actively traded commodities such as oil are quoted in US Dollars and the US Dollar represents over 60% of the worlds currency reserves (the currency held by central banks to back their liabilities). This in conjunction with the fact that the US Economy is by far the largest economy in the world has resulted in a market where more than 80% of all currency transactions involve the US Dollar. As a result of this, currency traders focus a lot of attention on what is happening with the US Economy, as this has a direct affect on not only on the US Dollar, but also on every other currency in the world.
The growing player in the forex market is the Euro, having been introduced as part of the plan to unify Europe in 1999 as the common currency for the European Union. This was due to the varying currencies and laws of the different European countries having a detrimental effect on competition in the global market place. To attempt to rectify this situation, and create a body with a common currency and a common set of laws, 15 countries became members of the European Union with 12 of these adopting the Euro as their common currency. As the individual countries economies that make up the Euro zone are nowhere near the size of the US economy, when they are combined into one single economy they are, and this had led to some to speculate that the Euro will one day rival, or even replace, the US Dollar as the major currency of the world.
The second largest individual economy in the world is Japan which in the Japanese Yen has the third most actively traded currency. Following impressively high growth during the 60’s, 70’s and early 80’s Japan’s economy began to stagnate in the late 1980’s and has not yet recovered completely. In an attempt to stimulate economic growth, the central bank of Japan has maintained low interest rates close to zero which has made the Japanese Yen the funding currency for many carry trades, something which we will discuss further in later lessons. It is also important to note that Japan is a country with relatively few natural energy resources and an economy focused on exports, so it relies heavily on energy imports and international trade. This translates as high susceptibility for the economy and currency to moves in the price of oil, and rising or slowing growth in the major economies with which it trades.
GBP and CHF
The United Kingdom is a member of the European Union but it was one of the three countries that decided against joining the European Monetary Union which is made up of the 12 countries that did adopt the Euro. The UK’s currency is known as the Pound Sterling and is a well respected currency of the world due to the Central Bank’s reputation for sound monetary policy. Switzerland’s currency the Swiss franc. While it should be noted that Switzerland is not one of the major economies of the world, the country has a reputation for its banking system and Swiss bank accounts, which are famous for their confidentiality. This, in combination with the country’s history for remaining neutral in times of war, makes the Swiss Franc a safe haven currency, or one which during times of uncertainty attracts capital flows.
When they are traded against the US Dollar, the Euro, Yen, Pound, and Swiss Franc make up the “major currency pairs” which we will discuss further in coming lessons. We will focus on currencies that are traded actively 24 hours a day thereby providing traders with the opportunity to move in and out of positions during the trading week at anytime they wish. While not considered part of the major currencies there are also three other currencies as well as the ones just mentioned which trade actively 24 hours a day and which we will cover these in this lesson. They are known as commodity currencies due to the fact that these countries are rich in natural resources, and the Australian Dollar, New Zealand Dollar and the Canadian Dollar are the three final currency pairs that we will cover.
The Australian Dollar is extremely dependent on the price of gold as the Australian economy is the world’s 3rd largest producer of gold. At the time of writing, interest rates in Australia are among the highest in the industrialized world which creates significant demand for Australian Dollars from speculators looking to profit from the high yield the currency and other Australian Dollar denominated assets. Likewise, the New Zealand Dollar is also very dependent on commodity prices, with commodities making up over 40% of the country’s total exports. In addition to this, the economy is also heavily dependent on Australia which is its largest trading partner. Also like Australia, at the time of writing New Zealand also has one of the highest interest rates in the industrialized world, which creates significant demand from speculators.
Finally there is the Canadian Dollar which much like the AUD and the NZD, the Canadian Economy, and therefore the currency, is also heavily linked to commodity prices. Canada is the 5th largest producer of gold and despite the fact that it is only the 14th largest producer of oil, it is also the largest foreign supplier of oil to the United States. Its links with the US do not end here as the country also exports more than 80% of its goods to the United States, making the economy and currency very susceptible to what happens with both commodity prices, and also the overall strength of the US Economy as well.