Trading the Major Currencies [Infographic]
Anyone who wants to trade currencies goes to forex, which is the foreign currency exchange market. By trading in the spot market, one currency is traded along with another as a pair. When you exit the position, you either gain or lose from the difference in the prices of the two currencies. There are several different foreign currencies to choose from, and they are referred to as major, minor or exotic. When paired with the USD, the major pairs offer the most liquidity. There isn't a lot of movement in the exotic pairs, since their level of liquidity is very low. Here are a few of the major currencies traded and information about what makes them strong.
USD – United States Dollar
For several reasons, the USD is the mostly widely trade currency in the world. When trading a major currency in the spot market with the USD making up one part of the pair, it is referred to as a major pair. Besides being responsible for the largest economy in the world, the USD is unofficially considered to be the world's currency reserve. The "greenback" is welcome in most companies, making it a popular currency and it is also vital in the commodities market. It can be seen that major events in the US will affect the value of its own currency and have a ripple affect around the world. Major news releases and its economic activity will immediately be seen in the value of the USD. The time to avoid trading the USD is around the time of the month when the non-farm payroll figures are released. These figures can cause major waves in the market and is an unpredictable time to place trades using the USD.
Even though the EURO, which is the European Union's official currency, is one of the newer currencies, it has risen to be the second most popular currency to trade in forex. Its value is set according to political and economic influences of the various countries in the Eurozone. Inflation rates, levels of debt, GDP output, interest rates, central bank policies and balance of trade within these countries all have an affect on the price. When it is traded with the USD, it becomes the most liquid and the most traded pair in the spot market.
Of all traded currencies around the globe, the Japanese Yen (JPY) is the third most popular. However, in the Asian market, it is the number one choice because of its potential in carry trade. It's a little different than the other currencies, as the Bank of Japan has an interest rate that amounts to zero. The typical trade is to borrow the Japanese Yen and then trade it for other currencies that tend to have high yields, such as the Australian Dollar. According to the differences in overnight interest earnings or charges, the trade can be profitable. Due to the profits that can be made in carry trade, there is an increasing demand for the Japanese Yen, which makes it even more valuable. The economy in Japan rises or falls depending on the export industry, so the Bank of Japan is making every effort to strengthen its export sector.
The Great British Pound (GBP) is the currency used in the United Kingdom. Even though the UK is a member of the European Union, the British government has stuck with its own currency. By doing so, the government can maintain complete control of its domestic interest rates. The trade balance in the UK and its interest rates can affect its value, which is mainly supported by natural gas and crude oil. Any quick movements up or down in the price of crude oil can quickly influence the value of the British pound.
Surprisingly, the Swissy, which is the currency in Switzerland, is the most stable and safest currency of all. 40% of the Swissy is supported by gold reserves, so gold prices directly influence its price.
As far as major pairs go, there is also the Australian dollar, which typically trades with China, and the Canadian dollar (CAD), or the Loonie. The CAD is closely connected to the price of crude oil.