Lesson 03-Major currency pairs

THE U.S. DOLLAR

The U.S. dollar (USD) is the base or quote currency with the following FOREX major currency pairs: USD/JPY, USD/CAD, USD/CHF, EUR/USD, GBP/USD, AUD/USD, and NZD/USD. Additionally, the USD is the base currency and is paired with the following currencies: NOK, SEK, SGD,

DKK, CNY, MXN, BRL, ZAR, and other exotic currencies depending on each broker’s availability.

The USD (also abbreviated $) is the official currency used in the United States of America. It is considered the standard currency unit that is used in commodity markets across the globe (especially gold and crude oil markets). It also is currently the most employed reserve currency in the

world. This allows the country to hold trade deficits with other countries without experiencing depreciation.

The volatility of the currency is usually low to medium. The economy of the United States has the strongest influence on the rest of the world, especially in the computer technology, medical, aerospace, and military fields. It is principally market-oriented; thus corporations and private businesses lead in decision making.

THE EURO

The euro (or EUR) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: EUR/USD, EUR/JPY, EUR/GBP, EUR/CHF, EUR/AUD, EUR/CAD, and EUR/NZD. Additionally, the EUR is the base currency and is paired with the following currencies: NOK, SEK,

SGD, DKK, CNY, MXN, BRL, ZAR, and other exotic currencies depending on each broker’s availability.

The euro is the currency that is actually used in most member countries of the European Union. It was created in 1999 and implemented in 2002 and represents the result of the most important monetary reform on the entire continent. It was designed with the intent of rendering free trade easier

between the members of the Euro zone, aiming at the same time for a political integration. The EUR/USD currency pair is nicknamed “fiber,” and this is said to come from the fact that the Euro zone comprises the greatest optical fiber network in the world. Its market volatility used to be

low, but it has been seen to increase to medium in the recent months. The European Central Bank (ECB) and the other central banks of every member country manage the currency through the European System of Central Banks (ESCB). The ECB is the only authority that has the power to

set monetary policy, whereas the issuing and distribution of notes and coins are done by the other members of the ESCB. All the decisions and procedures among the members of the European Union are based on agreements between its member countries. Adoption of the euro has allowed the Euro

zone to become the largest economy in the world. This actually makes it a stronger currency than the U.S. dollar.

THE AUSTRALIAN DOLLAR

The Australian dollar (AUD) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: AUD/USD, AUD/JPY, AUD/CHF, AUD/NZD, EUR/AUD, GBP/AUD, and AUD/CAD. It is also the base currency in some exotic pairs. The AUD is the official currency of the Commonwealth of Australia. It is also familiarly called the “Aussie,” which nickname also extends to the AUD/USD currency pair. It is the sixth most traded currency in the FOREX

market and accounts for about 5 percent of worldwide foreign exchange transactions. Its popularity stems from the almost inexistent intervention of Australia’s government in the FOREX market, with the add benefit of Australia’s political and economic stability. The volatility it shows in the

markets is low.

Australia’s economy is based on domestic industrial production (particularly of machinery and transportation equipment) and export of raw materials (mostly from its huge mining activity) and products from its agricultural sector.

THE CANADIAN DOLLAR

The Canadian dollar (CAD) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: USD/CAD, CAD/JPY, CAD/CHF, AUD/CAD, EUR/CAD, GBP/CAD, and NZD/CAD. The CAD is the official currency of Canada. Coin and bill denominations

are similar to those of the U.S. dollar. It is familiarly called the “loonie” because of the image of a loon that appears on one of the faces of the coins, and traders also use this nickname to designate the USD/CAD currency pair. The volatility of the Canadian dollar in the FOREX market is low, although

it is heavily related to fluctuations in oil prices. The economy of Canada is quite similar to that of the United States, being market- and production-oriented, having evolved from a mostly rural economy (before World War II), and now being principally urban and industrial, with the increase in manufacturing, mining, and service sectors. Its principal trading partner is the United States.

THE BRITISH POUND

The British pound sterling (GBP) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: GBP/USD, GBP/JPY, EUR/GBP, GBP/CHF, GBP/AUD, GBP/CAD, and GBP/NZD. Additionally, the GBP is the base currency paired with the following currencies:

NOK, SEK, SGD, DKK, CNY, MXN, BRL, ZAR, and other exotic currencies depending on each broker’s availability. The GBP is the official currency used in the United Kingdom (Great Britain). It is one of the world’s most widely traded currencies, along with the U.S. dollar, the Japanese yen, the euro, and the Swiss franc. Additionally, it is the currency unit with the highest value among the “majors.” The GBP/USD currency pair is familiarly called the “cable” in traders’ slang because the rates originally were transmitted via a trans-Atlantic telegraph cable. The market volatility of this currency is low to medium.

The economy of the United Kingdom is one of the largest in the world, with a strong agriculture and mining industry. The services sector represents the main percentage of the gross domestic product, and tourism has been developing strongly in recent years. THE SWISS FRANC The Swiss franc (CHF) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: USD/CHF, CHF/JPY, GBP/CHF, EUR/CHF, CAD/CHF, AUD/CHF, and NZD/CHF.

The CHF is the official currency of Switzerland and Liechtenstein. The currency is used by the Central Bank of Switzerland. The letters CHF stand for “Confederatio Helvetica Franc.” The USD/CHF currency pair is familiarly referred to as the “Swissie” among FOREX traders. The volatility of the Swiss franc in the FOREX market is usually low to moderate. The CHF is a fairly stable currency, especially in its relationship to the euro, with which it maintains a strong correlation. This causes the EUR/USD and USD/CHF currency pairs to be the highest negatively correlated

pairs, with a factor of more than 90 percent. Thanks to Switzerland’s strong political and economic stability, the currency is used mostly as a reserve currency by financial institutions and wealthy private individuals throughout the world.

THE JAPANESE YEN

The Japanese yen (JPY) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: USD/JPY, EUR/JPY, GBP/JPY, CHF/JPY, CAD/JPY, AUD/JPY, and NZD/JPY. The JPY is the official national currency of Japan. Originally pegged to the USD after World War II, the yen switched to a system of floating exchange rates after 1971. The volatility of the JPY in the FOREX market is usually low to medium. Japan’s economy is predominantly based on its manufacturing industry. The JPY traditionally has been a weak currency because its circulation is

limited to domestic business, thus hindering Japan’s position with regard to foreign trade. Additionally, the country depends completely on oil imports and exclusively on its export of manufactured goods; this renders the JPY very sensitive to rises in crude oil prices and overall energy costs.

The weakness of the currency has been maintained over the years as a protection for the local manufacturing and export industries; however, the JPY has been experiencing a rising trend that has diverted some foreign investments to other countries, where much lower costs still can be found.

The most important index of Japan’s economy is the industrial production index, which is strongly correlated with the export index.

THE NEW ZEALAND DOLLAR

The New Zealand dollar (NZD) is the base or quote currency with the following FOREX major and crossed-rate currency pairs: NZD/USD, NZD/JPY, GBP/NZD, EUR/NZD, NZD/CHF, and NZD/CAD. The NZD is the official currency of New Zealand and some of the islands on the Pacific Ocean. The currency is informally called the “kiwi” because of the image of a kiwi bird that appears on its $1 coin, and the term also designates most particularly the NZD/USD pair. The volatility of the

NZD in the FOREX market is low to medium. Similar to what happened in Australia, the economy of New Zealand has been transformed from an agricultural-based market limited to British concessionaries into a free and industrialized market now competing on the global scene. This has greatly helped the develop ment of technology; however, New Zealand’s exports still depend mostly on agricultural products.

THE DOLLAR INDEX

The U.S. Dollar Index (USDX) measures the global value of the USD relative to a basket of foreign currencies (e.g., Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, and Swiss franc) through a geometric progression weighted-average calculation. It was started in March

1973 with a value of 100, when the leading trade nations agreed to freely quote their currencies one against the other. After reaching a peak of 165, the USDX has been trading lower over the recent years, dropping almost to 70 in March 2008. The USDX is listed on the New York Board of Trade,

and its value is updated continuously 365 days a year. Its volatility can be compared with that of stock index futures because of its amplitude and variability.

GOLD CFDS

Metals, and most particularly gold, are usually traded through the futures market or gold exploration stocks. More recently, introduction into the markets of contracts for difference (CFDs) has allowed traders to have easier access to market transactions involving metals. The market quoted by the CFD provider is a two-way market, as with FOREX currency pairs, and thus the provider obtains a profit by means of the spread, charging no commissions on transactions. A gold CFD is a financial derivative that represents a theoretical order to buy or sell at least 10 ounces of gold, which is the minimum required to open a gold transaction. The margin required is quite low on gold CFDs,

usually representing 2 to 3 percent of the value of the transaction. You can take the contract on the spot price or the futures price, with standard contracts providing the equivalent of US $100 per $1 movement in the gold price and mini contracts providing one-tenth that size. There is also another type of CFD used for gold, called the binary CFD, that is based solely on the daily rise or fall in the price of gold, with value taken at the daily close. If gold rises, the binary CFD will close at

100, and if gold falls, it will close at 0 at the end of the day. The investor’s profit or loss is determined by the difference between the effective opening and closing prices.

CRUDE OIL

The price of crude oil is influenced directly by OPEC (Organization of the Petroleum Exporting Countries), which is made up of 12 nations whose economies depend on oil export revenues. The fluctuation in prices is related to production quotas that are imposed by this organization. The

final prices that consumers pay for oil products are determined by several components: supply and demand, effective production, refinery costs, and taxes on oil, which can vary greatly depending on country. Crude oil is traded on the market as a commodity through futures and spot markets as well as CFDs.

CROSS-RATE CURRENCY PAIRS

The currency pairs that derive their respective rates from their individual relationships with a third FOREX currency rate are called crosses or cross-rate pairs. All currency pairs that do not include the U.S. dollar fall into this group: EUR/GBP, EUR/CHF, EUR/AUD, GBP/CHF, CHF/JPY, CAD/JPY, EUR/JPY, and GBP/JPY. They are usually very volatile owing to a lesser liquidity, and this causes the spread between bid and ask prices to be much wider than on most majors, for example, the most liquid pairs, such as EUR/USD and USD/JPY. This can be a disadvantage because it increases the trading risks, but some of them can represent a very interesting option, such as the GBP/JPY pair, precisely because of its high volatility.

EXOTIC CURRENCY PAIRS

Some of the secondary foreign currencies that are yet somehow traded heavily in the FOREX market are the exotic currency pairs and a few European but non-euro-based denominations. They are usually traded as quote currency and paired with some of the most prominent majors (e.g., USD,

EUR, GBP, and AUD), but they also can become the base currency between each other.

CHINESE YUAN OR RENMINBI

The Chinese yuan (CNY) is the official currency of China. CNY is the official International Organization for Standardizations (ISO) code for the renminbi (RMB), issued by the People’s Bank of China. The currency displays a low to medium volatility in the FOREX market. In July 2005, China revalued the yuan (which was pegged to the USD) to allow it to fluctuate versus a basket of currencies and protect it from large swings owing to its ties with the American currency. China’s economy has become increasingly market-oriented and open to foreign trade and investments since 1978, which represent a strong element in its overall growth.

SWEDISH KRONA

The Swedish krona (SEK) is the official currency of Sweden. Its volatility is evaluated as medium to high mostly owing to the wide extent of foreign trade, where it constantly depends on the economic status of other currencies. Sweden is a member of the European Union, but it didn’t

adopt the euro and instead maintains its local currency as official. The country shows a low and stable inflation rate, and its economy is mostly based on exports, especially in the areas of information technology and telecommunications.

NORWEGIAN KRONE

The Norwegian krone (NOK) is the official currency of Norway. The country is one of the largest exporters of oil, and increases in the demand for oil have injected a great deal of money into its economy, making it very dependent on fluctuations in oil prices, however. The volatility of the currency itself is low. The economy of Norway is more service-oriented, and the country is

involved in a great number of offshore activities. It is a small country with a small population, but it is one of the wealthiest countries in Europe. Other exotic currencies you can find are the Danish krone (DKK) and The Singapore dollar (SGD) with low volatility, the Mexican peso (MXN)

and the Brazilian real (BRL) with low to medium volatility, and the South African rand (ZAR) with medium volatility.

THE IRAQI DINAR

Although not yet traded on the FOREX, the Iraqi dinar has been highly promoted as a good investment in recent years since Central Bank of Iraq started issuing a new and stable currency that experienced a great revaluation, rising approximately four times its original value (from about 4000

dinars per dollar as its lower low to 980 dinars per dollar as its highest high, actually trading at around 1200 dinars per dollar). This boom had started a series of wild speculations and the spread of a huge promotion, especially on the Internet, as well as scams associated with that promotion, where

unusually higher rates of exchange and thus extraordinary returns were promised in the hope that enough speculators would be attracted, thus making the exchange rate explode much higher as soon as the currency enters the market.

However, the rates for the currency vary over a wide range, and there is a huge difference between the official fixed rate of 1449 dinars for $1 set up by the International Monetary Fund (IMF) for the Central Bank of Iraq and retail quotes from dealers and trading companies, which offer quotes

between 1050 and 1350 dinars per $1. Additionally, this is a currency with practically no liquidity, mostly because of the discrepancies in price and the fact that the banks do not trade the dinar openly with the public. In addition, dealers will sell dinars to the market but not always buy back the dinars, so there are few counterparts for transactions, making it difficult for the investors to cash out of the currency. Finally, the overextended negotiations on the Internet, with inexperienced investors trapped and blinded by the fabulous promotion, allow dealers to mix old dinars, bought at a much cheaper price, and new dinars, thus lowering the value of the original amount purchased, which puts the

investor immediately at a loss. Some other dealers offer just a blatant scam, taking the money of the investor and disappearing, never delivering the currency. It is extremely important to be well informed before risking funds into any currency investment, especially when the offers are “too good to be true.”