Trading Tips for The Major Currency Pairs
Trading the US dollar opens a whole new market to the potential
trader, a market where one can participate in the cyclical nature of
the global economies. Wish to diversify away from the US dollar... buy
the Euro. Wish for movement in the market... trade the British Pound.
Believe that Japanese economy is going to grow... buy Japanese Yen.
Geopolitical tensions... buy the Swiss Franc. Trading majors gives you
choices.
All About the Majors: EUR/USD
Making headlines around the globe, the
EUR/USD is perhaps the best known pair in the world! For the past 3
years it's been making high after high, but a reversal could send the
price plummeting! In the meantime, it provides plenty of trading
opportunity as it ranges between extended breakouts.
The euro has been called the "anti-dollar"
since it is highly sensitive to US data. Because the recovery in the
US has been uncertain, the market closely watches developments in the
US economy to determine the strength of the recovery. Fears that the
US is hitting a "soft patch" in its economic growth generally boost
the euro.
Though the EUR/USD actively trades 24-hours
a day, the most action is concentrated in the time when the US and
European banking hours overlap, from 7:00 AM EST to 10:00 AM EST. Of
all the majors, this pair best reflects how the US economy is doing
compared to the rest of the world.
EUR/USD Profile
The US economy is dependant on imported oil—so movements in the price of oil tend to impact the value of the dollar!
- Average daily range: 111 pips
- Tends to consolidate into wide ranges after sharp trends
- Good for: trading in all time frames, depending on strategy
What moves EUR/USD?
Surprises in US economic releases
This pair is hypersensitive to US data and will move when results
come as a surprise- especially indicators that measure growth or
recovery in the US.
Talk of Euro as an alternative reserve currency
Because the US dollar is held as a reserve currency by many banks
around the world, a diversification into euros would drive the value
of the euro up causing a sharp move in the pair.
Interest rate differentials
As the Fed raises interest rates, money will flow into the US as
investors move to capitalize on these higher returns, boosting the
value of the dollar.
Trade Deficit Because the
imbalance of more imports vs. exports has the potential to reduce the
value of the dollar in the long run, the market is very concerned with
the trade balance in the US. Changes can cause a big shift in the
value of the US dollar.
Fundamentals to Watch
FOMC Rate Decisions
Watched closely since any increases in the interest rate automatically
bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid
fears of a "jobless recovery," the market has become very sensitive to
this indicator, which measures new jobs created in the US.
U.S. Current Account...
US Trade Balance A measure
of how much the US exports compared to how much it imports. To many
net imports can drive the value of the dollar down, since more capital
is leaving the US and being sold abroad, which drives down the value
of the dollar.
US TIC Data Treasury
Inflow Capital is a measure of how much foreign buying of US
securities is happening. This can offset an imbalance of too many
imports, since money is coming to the US to purchase goods which drives
the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown
of Federal Open Market Committee meetings. Scoured for any clues
about how the Fed perceives the state of the Economy. Since the Fed
makes interest rate decisions, insight into their outlook can help the
market predict the interest rate outlook.
European GDP Gross domestic product. A measurement of output, and more importantly, growth in an economy.
European Trade Balance A
measure of how much Europe is importing versus how much it exports.
Too many imports mean that the currency will get weaker because more
Euros are being sold to purchase foreign goods.
European CPI Consumer
price index, a measure of inflation in Europe. Inflation that is too
high or too low may prompt Europe’s central bank to raise or lower
interest rates.
ECB Rate Decision Refers
to the European Central Bank’s monetary policy. If inflation is too
high, the ECB will raise interest rates to slow borrowing and
spending. If economic growth is sluggish, lowering interest rates will
help boost activity. High interest rates make a currency more
attractive.
IFO Business Climate Survey
Acts as an early indicator for economic development in Germany, which
is Europe’s largest economy. Measure of sentiment that is weighted by
industry to provide a composite outlook.
German Unemployment As Europe’s largest economy, German unemployment is read as a gauge of economic conditions in the Euro zone as a whole.
All About the Majors: USD/JPY
The USD/JPY is an enigmatic pair that gives
a good proxy of US versus Japanese strength. At the same time, the
Bank of Japan works to keep the Yen weaker than perhaps it truly is,
since a strong Yen would hurt Japan’s export sector by making its
products more expensive.
Because interest rates in Switzerland are
so low, the CHF is also a popular funding currency for carry trades.
Because growth in the Swiss economy has been slow for some time, many
investors are entering into USD/CHF as a carry trade, making the pair
extremely sensitive to any changes in the interest rate outlook for
either the US or Switzerland.
The USD/JPY is most active at the open of
the Asian session (6 PM to 9 PM EST) as well as during the early US
trading session (7 AM – 10 AM EST).
USD/JPY Profile
Watch interest rates and
outlooks carefully – the JPY is a funding currency for many carry
trades and so it’s hypersensitive to the prospect of a rate change.
- Average daily range: 102 pips
- Popular funding currency for carry trades since interest rate is so low
- Good for: trading in all time frames, depending on strategy
What moves USD/JPY?
Chinese Yuan: If China
revalues its currency (thereby allowing it to become stronger and
closer to its true value) then Japanese exports would be able to
compete better in the US and China against Chinese products. If this
happens, the Bank of Japan could then stop intervening in the market
to keep the Yen weak, which would result in an increase in the value of
the Yen
Oil prices Japan is highly
dependent on imported oil. Higher oil prices can impede both
production and growth in Japan as it makes input costs significantly
more expensive.
Japanese reserve diversification
Japan holds large reserves of US securities and currency. A
diversification out of dollar only holdings could result in a large
sell off in the US dollar, driving the price down.
Fundamentals to Watch
FOMC Rate Decisions
Watched closely since any increases in the interest rate automatically
bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid
fears of a “jobless recovery,” the market has become very sensitive to
this indicator, which measures new jobs created in the US.
U.S. Current Account...
US Trade Balance A measure
of how much the US exports compared to how much it imports. To many
net imports can drive the value of the dollar down, since more capital
is leaving the US and being sold abroad, which drives down the value
of the dollar.
US TIC Data Treasury
Inflow Capital is a measure of how much foreign buying of US
securities is happening. This can offset an imbalance of too many
imports, since money is coming to the US to purchase goods which drives
the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown
of Federal Open Market Committee meetings. Scoured for any clues
about how the Fed perceives the state of the Economy. Since the Fed
makes interest rate decisions, insight into their outlook can help the
market predict the interest rate outlook.
Japanese Inflation A
measure of inflation in Japan. Closely monitored because when too high
or too low, it can prompt a change in the interest rate outlook of a
country.
Japanese Consumer Spending
A measure of how much Japanese consumers are spending. The Japanese
economy is driven primarily by its export sector, but consumer
spending is an important gauge of economic activity and prosperity.
BoJ Monetary Policy Meeting
When Japanese bank officials meet to determine monetary policy. Has
direct implications for currency traders since they often hint at
whether or not they intend to intervene to protect the Yen from
becoming too expensive—hence making their exports more expensive.
Japanese Trade Balance
Japanese imports vs. exports – the Japanese economy is highly
dependent on exports; a drastic change in this number can have
implications on the value of the Yen.
Japanese Industrial Production
A measure of activity in the Japanese manufacturing sector. This acts
as a gauge for the level of production and growth in the economy.
Tankan Survey A quarterly
business survey gives a detailed assessment of Japanese business
conditions. The headline number shows the difference between the
proportion of optimistic businesses and the proportion of pessimistic
businesses. A large positive number means that optimism pervades.
All About the Majors: GBP/USD
The GBP/USD, also called the cable, is by
far the most volatile pair of all the majors. Prone to huge breakouts
and dramatic reversals, the pair can move uninterrupted for hundreds
of pips, providing multiple opportunities to traders in all time
frames.
When the US lowered interest rates, the
GBP/USD became a hot carry trade – especially when the housing bubble
in the UK prompted the Bank of England to raise UK interest rates
further. However, this is becoming less the case with every rate hike
out of the US – making the pair extremely sensitive to any changes in
the interest rate outlook for either country.
The volatile pair trades most actively from
London open until lunchtime in the UK (around 4:30 AM EST) and then
during early US trading session (7AM to 10 AM EST). It can often
travel 150-200 pips a day.
GBP/USD Profile
Breakouts and reversals in the GBPUSD can be momentous-- active traders are advised to respect their stops!
- Average daily range: 156 pips
- Most volatile major; can make huge moves in a single day
- Good for: trading in all time frames, depending on strategy frames,
What moves GBP/USD?
Shifts in monetary outlook for the GBP Since the GBP is held by many in carry trades, this pair is very sensitive to any changes in interest rate outlooks.
UK housing market The UK
housing market is the Bank of England’s top gauge for inflation in the
UK. The housing bubble prompted a series of rate hikes, and new
developments are closely monitored by the market.
US economic data The
market is very sensitive to the outlook for the US economy, since
recovery has been uncertain. A pickup can have implications for the US
interest rate outlook, which could also affect the value of the
GBP/USD.
Fundamentals to Watch
FOMC Rate Decisions
Watched closely since any increases in the interest rate automatically
bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid
fears of a "jobless recovery," the market has become very sensitive to
this indicator, which measures new jobs created in the US.
U.S. Current Account...
US Trade Balance A measure
of how much the US exports compared to how much it imports. Too many
net imports can drive the value of the dollar down, since more capital
is leaving the US and being sold abroad, which drives down the value
of the dollar.
US TIC Data Treasury
Inflow Capital is a measure of how much foreign buying of US
securities is happening. This can offset an imbalance of too many
imports, since money is coming to the US to purchase goods which drives
the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown
of Federal Open Market Committee meetings. Scoured for any clues
about how the Fed perceives the state of the Economy. Since the Fed
makes interest rate decisions, insight into their outlook can help the
market predict the interest rate outlook.
Bank of England Meeting
Meeting at which Bank of England officials set monetary policy and
decide whether to change interest rates or leave them the same.
UK Housing Prices The UK
housing market is the number one gauge of inflation in the United
Kingdom. It is closely watched since the Bank of England will raise
rates if growth is too high.
UK Unemployment The UK economy is closely monitored for any changes. Unemployment is a good general indicator of the health of an economy.
UK Retail Sales figures provide a good indication of...
UK Inflation indicators are watched closely as they can...
All About the Majors: USD/CHF
Known increasingly as the "legacy pair" as
trading activity moves from USD/CHF to EUR/CHF, the Swissy is the
predominant safe haven currency in the world because of Switzerland’s
long history of stability and neutrality. When the markets sense
geopolitical turmoil, capital tends to move into Switzerland.
Unexpected global events and spikes in the price of gold will create
opportunities in this pair.
Because interest rates in Switzerland are
so low, the CHF is also a popular funding currency for carry trades.
Because growth in the Swiss economy has been slow for some time, many
investors are entering into USD/CHF as a carry trade, making the pair
extremely sensitive to any changes in the interest rate outlook for
either the US or Switzerland.
USD/CHF is most active during European open
hours (3 AM to 4:30 AM EST) through the early US trading session (7AM
to 10 AM EST).
USD/CHF Profile
USD/CHF tends to trade inversely to the EUR/USD, and will trade in a range when EUR/USD is ranging.
- Average daily range: 127 pips
- Popular funding currency for carry trades since interest rate is so low
- Good for: trading during certain times of the day, when Europe and US open
What moves USD/CHF?
Geopolitical tension:
US-negative developments in the world will cause a move in the pair as
investors move funds out of US dollars into "safe-haven" Swiss
francs.
Gold prices Higher or
lower gold prices will cause a corresponding move in the Swiss franc
since the Swiss franc is one of the few world currencies that still is
partly backed by gold.
SNB monetary policy Swiss monetary policy changes could have an effect on the standing of the CHF as a carry trade funding currency.
Fundamentals to Watch
FOMC Rate Decisions
Watched closely since any increases in the interest rate automatically
bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid
fears of a "jobless recovery," the market has become very sensitive to
this indicator, which measures new jobs created in the US.
US Current Account...
US Trade Balance A measure
of how much the US exports compared to how much it imports. Too many
net imports can drive the value of the dollar down, since more capital
is leaving the US and being sold abroad, which drives down the value
of the dollar.
US TIC Data Treasury
Inflow Capital is a measure of how much foreign buying of US
securities is happening. This can offset an imbalance of too many
imports, since money is coming to the US to purchase goods which drives
the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown
of Federal Open Market Committee meetings. Scoured for any clues
about how the Fed perceives the state of the Economy. Since the Fed
makes interest rate decisions, insight into their outlook can help the
market predict the interest rate outlook.
Swiss KoF Leading Indicators
A composite of business surveys from various sectors of the economy
(industry, retail and wholesale) that is combined to form a leading
indicator that aims to project GDP growth approximately 8 months into
the future.
Swiss CPI Consumer Price
Index. A measure of inflation in Switzerland; a significant change may
have implications for interest rate policy in Switzerland.
Comments from Swiss officials Watched for any indications of change in Swiss monetary policy.
Swiss GDP Gross Domestic Product. A measure of growth and productivity in the Swiss economy.
SNB Rate Decisions Any changes in the interest rate by the Swiss National Bank has implications for the pair as a carry trade.
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