Lesson 7 – Understanding Currency for Forex Traders
Forex trading, especially successful forex trading, is all about information. The more of it you have and can process, the better. It will improve your decision making on where the market will move and how quickly.
Thus, the higher the likelihood of making a successful trade.
Before checking up to date specific information on each currency. It would be wise to first check and understand how each country and currency tends to react to certain news that may come out while you are trading.
Here is a quick overview of the main currencies you will be trading, and what to keep an eye on when listening for indicators of a price movement in the news.
United Kingdom (GBP) Forex Indicators
- Central Bank: The Bank of England
- Currency – Great British Pound (GBP)
The London exchange is the world biggest trading centre in the world, accounting for 35% of total volume.
Therefore, the market is most active in the hours which it is open.
From 0800 to 1700 GMT.
The main indicator to keep an eye on is the interest rate set by the Bank of Englang. As London is a world centre for currency trading. A slight shift in the monetary policy will likely cause a large shift through the whole market. Especially the GBP pairings.
Since Great Britain is generally quite stable. Most other macroeconomic indicators don’t produce huge swings in pricing.
United States of America Forex Indicators
- Central Bank: The Federal Reserve
- Currency: United States Dollar (USD)
Now, London may have the highest volume. However the USD is part of 87% of all currency trades in the world.
If the world had a currency it is based on most. It is definitely the USD.
It’s truly impressive when you consider the daily trading volume of the forex market is 5.1 Trillion USD.
New York is the main market in the USA, second largest after London. Therefore the New York opening hours are definitely worth paying attention to as they tend to be very active, especially when they overlap with London’s trading hours.
It is also wise to pay attention to the US news as so much of the worlds currency trading is based in USD. An announcement that impacts the US economy can have massive effects on almost the entire forex markets, and thus creates a large amount of trading opportunities.
Aside from looking at the interest rates and monetary policy set by the federal reserve, the american stock exchanges, mainly the New York Stock Exchange (NYSE) is worth paying attention to as its value is highly correlated with the USD. Meaning if it goes up, the dollar will tend to be strong. If it goes down, the USD will tend to be weak.
The European Union
- Central Bank: The European Central Bank (ECB)
- Currency: Euro (EUR)
The Euro is the official currency of 19 EU countries. Making it one of the most widely used currencies in the world.
Even now, after brexit, there are still many countries seeking to enter the EU and using the euro as their main currency do to the stability and ease of trade it provides. The main benefit of the euro for us forex traders is that the European Central Bank must always balance the needs of all the member nations.
This avoid issues arising within the euro as a currency, in case and individual country faces political instability. This makes and manipulation, inflation, deflation or sudden spikes in the euro highly unlikely, as the currency is fairly decentralized.
Therefore, the euro is generally less volatile that the other currencies, but with exceptions of course.
One should always pay attention to the ECBs policy announcement and interest rate. Although these past years it has been quite stably hovering around 0-0.5%.
- Central Bank: Swiss National Bank
- Currency: Swiss Franc (CHF)
Despite being in the middle of Europe, Switzerland is not part of the EU. A country most famous for its neutrality, and for being one of the richest countries in the world.
As you may have guessed, most of their trade is with their neighbors in the EU. And they also have alot of trade with the US. Therefore these currency pairings can be quite active, volatile enough to be tradable.
The trick to trading the Swiss franc (CHF) is the price of gold. A significant part of swiss currency is backed in gold reserves, therefore the CHF is heavily correlated with the Gold price. Watch out for any swings there, and you might be able to find a quick win where the CHF has not adjusted to the price of gold yet.
- Central Bank: Bank Of Canada
- Currency: Canadian Dollar (CAD)
Canada is a significantly large economy on the world’s stage. And does 70% of its international trade with the United States as you would expect.
Canada is also a large exporter of oil, therefore the CAD is heavily like to prices and events in the crude oil industry and commodity market.
Watch out for this when trading the pair with the most volume: USD/CAD.
- Central Bank: Reserve Bank of Australia
- Currency: Australian Dollar (AUD)
The australian dollar has one of the highest interest rates internationally. For this reason, the AUD is often used as part of currency carry trades, which is where traders find advantage of interest rate differences between currencies.
The main premise of a carry trade is to sell a currency with a low interest rate (such as the euro) for a high interest rate currency, thereby making medium term gains via interest.
This is usually done with leverage to make the trade size and thus the interest gained larger.
The AUD is a stable currency, with its central bank reliably maintaining inflation at 2%. Furthermore, the AUD is heavily linked with the gold price as Australia is one of the worlds biggest exporters of gold.
- Central Bank: Bank of Japan
- Currency: Japanese Yen (JPY)
An economic powerhouse, Japan is ranked as the 3rd biggest economy in the world. The Yen is famous for its historically low interest rates, ever since the 1980s, and therefore is often used in currency carry trades, often with the AUD.
This makes it volatile to the Bank of Japans announcements about its monetary policies and interest rate updates.
There is a good amount of volume with the JPY with any other of the worlds currencies, with the USD/JPY being the second most traded pair in the world (after EURUSD).
Japan is also politically and economically very stable, even through natural distasters and therefore one should pay attention to the Bank of Japans announcements and to keep an eye of what China is doing, as it is Japans largest trading partner.