In our last lesson we learned about the 3 major money centers of the world and the characteristics of the three, eight hour trading sessions which make up the forex market’s 24 hour trading day. In today’s lesson we are going to look at the main currencies of the world which we will focus on throughout the rest of this course.
Although there has been much press recently about the US Dollar loosing its status, there is no doubt that as of this lesson and most likely for the foreseeable future, the US Dollar still reigns supreme over all other currencies of the world. The price for the majority of traded commodities such as oil is 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). These facts combined with the fact that the US Economy is by far the largest economy in the world has resulted in a market where over 80% of all currency transactions involve the US Dollar. As you can probably imagine after hearing this, currency traders pay heavy attention to what is happening with the US Economy, as this has a very direct affect not only on the US Dollar but on every other currency in the world as well.
The rising power of the currency world is the Euro which was introduced in 1999 as part of an overall plan to unify Europe into something known as the European Union. In short the differing laws and currencies of the different European countries were making them less competitive in the global market place. To try and fix this problem and create one entity with a common set of laws and a common currency, 15 countries joined what is now referred to as the European Union and 12 of those countries adopted the Euro as their common currency. While the economies of the individual countries that make up the Euro Zone don’t come anywhere close to the size of the US Economy, when combined into one Euro Zone economy they do, and therefore some say the Euro will eventually rival or even replace the Dollar as the main currency of the world.
Japan, which is the second largest individual economy in the world, has the third most actively traded currency, the Japanese Yen. After experiencing impressive growth in the 60’s, 70’s and early 80’s Japan’s economy began to stagnate in the late 1980’s and has yet to fully recover. To try and stimulate economic growth, the central bank of Japan has kept interest rates close to zero making the Japanese Yen the funding currency for many carry trades, something which we will learn more about in later lessons. It is also important to understand at this stage that Japan is a country with few natural energy resources and an export oriented economy, so it relies heavily on energy imports and international trade. This makes the economy and currency especially susceptible to moves in the price of oil, and rising or slowing growth in the major economies in which it trades with.
While the United Kingdom is a member of the European Union it was one of the three countries that opted out of 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 because of the Central Bank’s reputation for sound monetary policy.
Next in line is Switzerland’s currency the Swiss franc. While Switzerland is not one of the major economies of the world, the country is known for its sound banking system and Swiss bank accounts, which are basically famous for banking confidentiality. This, combined with the country’s history of remaining neutral in times of war, makes the Swiss Franc a safe haven currency, or one which attracts capital flows during times of uncertainty.
When traded against the US Dollar, the Euro, Yen, Pound, and Swiss Franc make up known as the “major currency pairs” which we will learn more about in coming lessons.
For the purposes of this course we will focus on currencies that trade actively 24 hours a day allowing the trader to move in and out of positions during the trading week at anytime as he or she pleases. Although not considered part of the major currencies there are three other currencies in addition to the ones just listed which trade actively 24 hours a day and which we will be covering in this course. Known as the commodity currencies because of the fact that they are natural resource rich countries, the Australian Dollar, New Zealand Dollar and the Canadian Dollar are the three final currency pairs we will be covering.
Also known as “The Aussie” the Australian Dollar is heavily dependant upon the price of gold as the Australian economy is the world’s 3rd largest producer of gold. As of this lesson interest rates in Australia are also among the highest in the Industrialized world creating significant demand for Australian Dollars from speculators looking to profit from the high yield the currency and other Australian Dollar denominated assets offer.
Like the Australian Dollar the New Zealand Dollar which is also known as “The Kiwi” is heavily dependant on commodity prices, with commodities representing over 40% of the countries total exports. The economy is also heavily dependant on Australia who is its largest trading partner. Like Australia, as of this lesson New Zealand also has one of the highest interest rates in the industrialized world, creating significant demand from speculators in this case as well.
Last but not least is the Canadian Dollar or otherwise affectionately known as “The Loony”. Like its commodity currency brothers, the Canadian Economy, and therefore the currency, is also heavily linked to what happens with commodity prices. Canada is the 5th largest producer of gold and while only the 14th largest producer of oil, unbeknownst to most; it is also the largest foreign supplier of oil to the United States. Its relationship with the US does not end here either as the country exports over 80% of its goods to the United States, making the economy and currency very susceptible to what happens not only with commodity prices, but to the overall health of the US Economy as well.
That’s our lesson for today. In our next lesson we are going to introduce the Forex Trading Platform so we can begin learning how to place some trades using paper money as we learn more about the foreign exchange market and potential ways to profit from the movement in the world’s main currencies.
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