What You Need To Know About The World’s Major Currencies
The forex market is all about trading the world’s currencies against each other, as their value is in a constant state of flux. Forex traders track the movement of the market with technical analysis tools and other methods, in order to try and buy and sell currency pairs for a profit.
The language of forex currencies
Currencies in forex trading are always quoted against each other in pairs, and the exchange rate is the relative price of the two currencies. The base currency is always quoted first, and the quote currency second. Each currency is identified by a three-letter alphabetic code which is shorthand for the nation or economy, and the name of their currency.
For example, the US dollar is listed as the USD, the Euro is listed as the EUR, and the Great British Pound is listed as the GBP. Each currency is also linked to a numerical code which is used for computer algorithms, but traders always refer to the alphabetic code.
Forex traders track how much the quote currency has risen or fallen in value compared to the base currency by looking at the Percentage in Point, or ‘pip’ for short. This represents the change in value between two currencies, and it is the smallest whole unit price movement that can be made. It’s expressed as the last decimal place of a price quote.
A forex trader is always looking to buy currencies which they expect to rise in value (known as going long), or sell currencies which have risen in value (known as going short). They may also make the decision to sell off currencies which have not risen in value, but they expect to fall in value, in order to mitigate against further losses.
Currencies are purchased and sold in lots, and the lot size refers to the units of base currency in each trade. A standard lot size equals 100,000 units of the base currency. This might seem like a high amount, but because the changes in value are based on the pip percentage points, it is necessary to make any kind of worthwhile profit.
Forex traders usually trade through a broker platform, which offers them instant forex funding and allows them borrow money to make trades, even from a modest initial investment. This means that a trader with a prudent risk management plan and a strong technical understanding can make healthy profits, even through part time trading.
Most brokers will usually enable the trading of smaller lot sizes, known as mini lots, micro lots, and nano lots. This is useful for new traders who are just starting out in the market, and want to learn how to trade without the risk of significant financial losses. For example, a mini account can be opened with as little as $100.
The major currencies
Most new forex traders trade in the major currencies, because they have a high degree of liquidity on the market. This means that there are always plenty of buyers and sellers to be found, and they are less prone to dramatic fluctuations in value. The minor currencies and exotics (from developing or emerging economies) are more prone to volatility.
The six major currencies of the world are the US dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Swiss Franc (CHF), and the Canadian dollar (CAD). Here’s a look in more depth at what influence each currency has in the forex market.
The US dollar
The USD is the most traded currency in the world, and is the most widely accepted currency throughout the world. Some developing countries use it as their own major currency, instead of a more local one, for this reason. Other countries peg the value of their own currency to the US dollar, because it is regarded as the safest and most stable in the world.
The US dollar also the used as the standard currency lot for many high-value commodities, such as crude oil and precious metals. When there are significant fluctuations in the value of these commodities, such as rising oil prices, it has a direct impact on the value of the dollar. Therefore, most forex traders will keep an eye on the major commodity prices.
The EUR is the second most traded currency in forex, despite only being introduced in 1999. It is also the second most used currency around the world, and is the official currency of 19 of the 27 EU member countries. Most of these countries, such as Germany, France, and Spain, have strong, stable and well-developed economies.
Factors which influence the value of the Euro include the unemployment rate, the Consumer Price Index, and the inflation rate. One of the drawbacks of the Euro was demonstrated during the global financial crash of 2008/9.
Because it is tied to smaller and less stable economies such as that of Greece, as well as the larger ones, the problems of one affect the value of the Euro as a whole. It can be difficult to establish a status quo which is beneficial to all the parties, and it is more prone than other currencies to be moved by the influence of political events.
The Japanese Yen
The JPY is the third most frequently traded currency in the forex market, and the most traded Asian currency. It is used a measure of the wider economies of the Pan-Pacific region.
Part of its popularity on the forex markets can be attributed to its role in the carry trade. This is because Japan’s interest rates are deliberately kept low, meaning that traders can borrow at low or no cost to invest elsewhere, and make a profit on the difference.
Although Japan has a strong economy built around manufacturing and export, the fact that the JPY is borrowed to such a high degree means that it rarely rises substantially in value during times of economic stability.
However, it has an advantage when there is turmoil and uncertainty in the markets, because it remains shielded from fluctuating interest and inflation rates, and it is seen as safer than the US dollar or Euro.
The JPY is a stable currency, and also very secure. Yen notes and coins carry advanced security features which makes it almost impossible to produce counterfeits.
The British Pound
The GBP, also known as sterling, is the world’s fourth most traded currency. It’s often paired with the USD and the EUR, but much less frequently against other currencies. The high value of the pound against other currencies makes it popular in the forex markets.
The value of the GBP is closely linked to the political stability of the country and the performance of the economy. The most common indices used to value the GPB include the Consumer Price Index, the Gross Domestic Product (GDP), the average earnings, the GDP per Capita, and the GDP Deflator.
The UK is traditionally regarded as a politically safe and stable country with a strong economy. However, the economy is currently under some extra pressure after the UK’s official withdrawal from the European Union at the beginning of this year.
The Swiss Franc
The CHF is regarded as a ‘safe haven’ currency, which is not prone to great volatility on the forex markets. Switzerland is a country with a tradition of maintaining political neutrality on the world stage. It is a not a member of either the EU or the G-7 countries, and it has a risk-averse approach to its economy.
Although the Swiss economy is small, it has one of the world’s larger reserves of gold, which tends to hold its value, meaning that it is protected from the effects of inflation. The CHF is seen as a good investment for those looking for a high degree of security, stability, and protection from inflation.
The Canadian dollar
The CAD is major currency because Canada is a country rich in natural resources, and it is one of the world’s major exporters of commodities such as crude oil, precious minerals, timber, and natural gas.
Therefore, the value of the CAD is closely correlated with the relative price of these commodities, and this can lead to periods of volatility on the forex markets.
Nonetheless, it is regarded as a benchmark currency by the world’s Central Banks. Canada’s close proximity to the US also helps to boost its trading position, as the US economy is the largest and most active in the world.
Other commodity currencies
Some references will also list the other commodity currencies, the Australian dollar (AUS) and the New Zealand dollar (NZD) as major currencies.
Australia is rich in natural resources, including precious minerals and metals, oil and agricultural products. This means that the AUS is popular with commodity focused forex traders, although subject to the market fluctuations you would expect.
Likewise, the NZD is a strong and stable commodity currency which is widely traded on the forex markets, and is popular with the island territories of the South Pacific.