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Top 8 Most Tradable Currencies
Although the foreign exchange market is often billed as a banker's game, currencies
can sometimes be great diversification for a portfolio that might have
hit a bit of a rut. It's a market that can also offer tremendous
opportunity when other global forums enter the doldrums. As a result,
knowing a little bit about forex,
and the fundamentals behind it, can make significant additions to any
trader, investor or portfolio manager's arsenal. Let's take a look at
eight currencies every trader or investor should know, along with the central banks of their respective nations.
1. U.S. Dollar (USD)
Central Bank: Federal Reserve (Fed)
Current Interest Rate Information: http://www.federalreserve.gov/releases/h15/data.htm
The Almighty Dollar
Created in 1913 by the Federal Reserve Act, the Federal Reserve System (also called the Fed) is the central banking body of the U.S.
The system is itself headed by a chairman and board of governors, with
most of the focus being placed on the branch known as the Federal Open Market Committee (FOMC). The FOMC supervises open market operations as well as monetary policy or interest rates.
The current committee is comprised of five of the 12 current Federal Reserve Bank presidents and seven members of the Federal Reserve Board, with the Federal Reserve Bank of New York
always serving on the committee. Even though there are 12 voting
members, non-members (including additional Fed Bank presidents) are
invited to share their views on the current economic situation when the
committee meets every six weeks. (For more information on the Federal
Reserve, read our Federal Reserve tutorial.)
Sometimes referred to as the greenback, the U.S. dollar (USD) is the home denomination of the world's largest economy, the United States. As with any currency, the dollar is supported by economic fundamentals, including gross domestic product,
and manufacturing and employment reports. However, the U.S. dollar is
also widely influenced by the central bank and any announcements about
interest rate policy. The U.S. dollar is a benchmark
that trades against other major currencies, especially the euro,
Japanese yen and British pound. (For further reading about trading this
currency, see Taking Advantage Of A Weak U.S. Dollar.)
2. European Euro (EUR)
Central Bank: European Central Bank (ECB)
Current Interest Rate: http://www.ecb.int/stats/monetary/rates/html/index.en.html
The Dollar's Nemesis
Headquartered in Frankfurt, Germany, the European Central Bank is the central bank of the 15 member countries of the Eurozone.
In similar fashion to the United States' FOMC, the ECB has a main body
responsible for making monetary policy decisions, the Executive
Council, which is composed of five members and headed by a president.
The remaining policy heads are chosen with consideration that four of
the remaining seats are reserved for the four largest economies in the
system, which include Germany, France, Italy and Spain.
This is to ensure that the largest economies are always represented in
the case of a change in administration. The council meets approximately
10 times a year. (Read more about this and other central banks
discussed here in Get To Know The Major Central Banks.)
In addition to having jurisdiction over monetary policy, the ECB also holds the right to issue banknotes
as it sees fit. Similarly to the Federal Reserve, policy makers can
interject at times of bank or system failures. The ECB differs from
the Fed in an important area: instead of maximizing employment and
maintaining stability of long-term interest rates, the ECB works
towards a prime principle of price stability, with secondary
commitments to general economic policies. As a result, policymakers
will turn their focus to consumer inflation in making key interest rate decisions. (Read more about how central banks control inflation in What Are Central Banks?)
Although
the monetary body is somewhat complex, the currency is not. Against the
U.S. dollar, the euro (EUR) tends to be a slower currency compared to
its colleagues (i.e., the British pound or Australian dollar). On an
average day, the base currency can trade between 30-40 pips,
with more volatile swings averaging slightly more, at 60 pips wide per
day. Another trading consideration is time. Trading in the euro-based
pairs can be seen during the London and U.S. sessions (which occur from 2am through 11am EST). (Read more about choosing the optimal time to trade in How To Set A Forex Trading Schedule.)
3. Japanese Yen (JPY)
Central Bank: Bank of Japan (BoJ)
Current Interest Rate: http://www.boj.or.jp/en/index.htm
Technically Complex, Fundamentally Simple
Established as far back as 1882, the Bank of Japan
serves as the central bank to the world's second largest economy. It
governs monetary policy as well as currency issuance, money market
operations and data/economic analysis. The main Monetary Policy Board
tends to work toward economic stability, constantly exchanging views
with the reigning administration, while simultaneously working toward
its own independence and transparency. Meeting 12-14 times a year, the
governor leads a team of nine policy members, including two appointed
deputy governors.
The Japanese yen (JPY) tends to trade under the identity of a carry trade component. Offering a low interest rate, the currency is pitted against higher-yielding currencies, especially the New Zealand and Australian dollars and the British pound. As a result, the underlying
tends to be very erratic, pushing traders to take technical
perspectives on a longer-term basis. Average daily ranges are in the
region of 30-40 pips, with extremes as high as 150 pips. To trade this
currency with a little bit of a bite, focus on the crossover of London and U.S. hours (6am - 11am EST). (Read more about forex carry trades in Currency Carry Trades Deliver.)
4. British Pound (GBP)
Central Bank: Bank of England (BoE)
Current Interest Rate: http://www.bankofengland.co.uk/
The Queen's Currency
As the main governing body in the United Kingdom, the Bank of England
serves as the monetary equivalent of the Federal Reserve System. In the
same fashion, the governing body establishes a committee headed by the
governor of the bank. Made up of nine members, the committee includes
four external participants (appointed by the Chancellor of Exchequer),
a chief economist, director of market operations, committee chief
economist and two deputy governors.
Meeting every
month of the year, the Monetary Policy Committee (MPC) decides on
interest rates and broader monetary policy, with primary considerations
of total price stability in the economy. As such, the MPC also has a
benchmark of consumer price inflation set at 2%. If this benchmark is
compromised, the governor has the responsibility to notify the
Chancellor of Exchequer through a letter, one of which came in 2007 as
the U.K. CPI rose sharply to 3.1%. The release of this letter tends to be a harbinger to markets, as it increases the probability of contractionary monetary policy. (For more on the role of the CPI, read The Consumer Price Index: A Friend To Investors.)
A
little bit more volatile than the euro, the British pound (GBP, also
sometimes referred to as "pound sterling" or "cable") tends to trade a
wider range through the day. With swings that can encompass 100-150
pips, it isn't unusual to see the pound trade as narrowly as 20 pips.
Swings in notable cross currencies tend to give this major a volatile
nature, with traders focusing on pairs like the British pound/Japanese
yen and the British pound/Swiss franc. As a result, the currency can be
seen as most volatile through both London and U.S. sessions, with minimal movements during Asian hours (5pm - 1am EST). (Read more about currency pairs in Using Currency Correlations To Your Advantage.)
5. Swiss Franc (CHF)
Central Bank: Swiss National Bank (SNB)
Current Interest Rate: http://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_interest_exchange_rates
A Banker's Currency
Different
from all other major central banks, the Swiss National Bank is viewed
as a governing body with private and public ownership. This belief
stems from the fact that the Swiss National Bank is technically a corporation under special regulation. As a result, a little over half of the governing body is owned by the sovereign states of Switzerland.
It is this arrangement that emphasizes the economic and financial
stability policies dictated by the governing board of the SNB. Smaller
than most governing bodies, monetary policy decisions are created by
three major bank heads who meet on a quarterly basis.
The governing board creates the band (plus or minus 25 basis points) of where the interest rate will reside.
Similar
to the euro, the Swiss franc (CHF) hardly makes significant moves in
the any of the individual sessions. As a result, look for this
particular currency to trade in the average daily range of 35 pips per
day. High-frequency volume for this currency is usually pitted for the London session (2am - 8am EST). (For more on the CHF, read Forex: Making Sense Of The Euro/Swiss Franc Relationship.)
6. Canadian Dollar (CAD)
Central Bank: Bank of Canada (BoC)
Current Interest Rate: http://www.bankofcanada.ca/en/rates/interest-look.html
The Loonie
Established by the Bank of Canada Act of 1934, the Bank of Canada
serves as the central bank called upon to "focus on the goals of low
and stable inflation, a safe and secure currency, financial stability
and the efficient management of government funds and public debt."
Acting independently, Canada's central bank draws similarities with the
Swiss National Bank because it is sometimes treated as a corporation,
with the Ministry of Finance directly holding shares. Despite the
proximity of the government's interests, it is the responsibility of
the governor to promote price stability at an arm's length from the
current administration, while simultaneously considering the
government's concerns. With an inflationary benchmark of 2-3%, the BoC
has tended to remain a shade more hawkish rather than accommodative when it comes to any deviations in prices.
Keeping
in touch with major currencies, the Canadian dollar (CAD) tends to
trade in similar daily ranges of 30-40 pips. However, one unique aspect
about the currency is its relationship with crude oil, as the country
remains a major exporter of the commodity. As a result, plenty of
traders and investors use this currency as either a hedge against
current commodity positions or pure speculation, tracing signals from
the oil market. (Read more about the CAD's relationship with oil in Commodity Prices And Currency Movements.)
7. Australian/New Zealand Dollar (AUD/NZD)
Central Bank: Reserve Bank of Australia / Reserve Bank of New Zealand (RBA/RBNZ)
Current Interest Rate: http://www.rba.gov.au/ and http://www.rbnz.govt.nz/
Always A Carry Favorite
Offering one of the higher interest rates in the major global markets, the Reserve Bank of Australia
has always upheld price stability and economic strength as cornerstones
of its long-term plan. Headed by the governor, the bank's board is made
up of six members-at-large, in addition to a deputy governor and a
secretary of the Treasury. Together, they work toward to target
inflation between 2-3%, while meeting nine times throughout the year.
In similar fashion, the Reserve Bank of New Zealand looks to promote inflation targeting, hoping to maintain a foundation for prices.
Both currencies have been the focus of carry traders, as the Australian and New Zealand
dollars (AUD and NZD) offer the highest yields of the seven major
currencies available on most platforms. As a result, volatility can be
experienced in these pairs if a deleveraging
effect takes place. Otherwise, the currencies tend to trade in similar
averages of 30-40 pips, like other majors. Both currencies also
maintain relationships with commodities, most notably silver and gold.
(Read more about carry trades and the AUD in Turn To The Carry – A Different Flavor Of The Setup.)
8. South African Rand (ZAR)
Central Bank: South African Reserve Bank (SARB)
Current Interest Rate: http://www.reservebank.co.za/
Emerging Opportunity
Previously modeled on the United Kingdom's Bank of England, the South African Reserve Bank stands as the monetary authority when it comes to South Africa.
Taking on major responsibilities similar to those of other central
banks, the SARB is also known as a creditor in certain situations, a clearing
bank and major custodian of gold. Above all else, the central bank is
in charge of "the achievement and maintenance of price stability". This
also includes intervention in the foreign exchange markets when the
situation arises.
Interestingly enough, the South
African Reserve Bank remains a wholly owned private entity with more
than 600 shareholders that are regulated by owning less than 1% of the
total number of outstanding shares.
This is to ensure that the interests of the economy precede those of
any private individual. To maintain this policy, the governor and
14-member board head the bank's activities and work toward monetary
goals. The board meets six times a year.
Seen as
relatively volatile, the average daily range of the South African rand
(ZAR) can be as high as 1,000 pips. But don't let the wide daily range
fool you. When translated into dollar pips, the movements are
equivalent to an average day in the British pound, making the currency
a great pair to trade against the U.S. dollar (especially when taking
into consideration the carry potential). Traders also consider the
currency's relationship to gold and platinum. With the economy being a
world leader when it comes to exports of both metals, it is only
natural to see a correlation similar to that between the CAD and crude
oil. As a result, consider the commodities markets in creating
opportunities when economic data is scant. (Read more about the rand in
The New World Of Emerging Market Currencies.)
Conclusion
As
financial markets continue to evolve and grow globally, foreign
exchange and currencies will play an increasingly large role in
day-to-day transactions. Notional volumes for the market sector are
already averaging approximately $3 trillion per day. As a result,
whether a conversion for physical trade or a simple portfolio diversification play, currencies continue to offer more opportunities to both the retail and institutional investor.
http://investopedia.com/articles/forex/08/top-8-currencies-to-know.asp
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| Category: Forex for Beginners | Added by: forex-market (2009-05-18)
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| Views: 1675
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