FOREX FOCUS

Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market, however, we must understand the factors that affect the forex market. With that in mind, STOCKS& COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.


Currency Cross Adventures

by Grace Cheng

It's not always necessary to trade currency pairs priced in US dollars. Be a bit bold and brave these crosses.

Listed below are the seven most liquid US dollar (USD)-involved currency pairs, composed of the eight most-traded currencies in the world, with the first four pairs being the majors, followed by three commodity pairs:

The majors:
  • EUR/USD
  • USD/CHF
  • GBP/USD
  • USD/JPY

    • The commodity pairs:

  • USD/CAD
  • AUD/USD
  • NZD/USD

    • Take a glance at these currency pairs, and you will notice a common currency among them: Yes, the almighty US dollar. That is hardly surprising, given that the United States has the largest economy in the world, and almost everyone anywhere will accept the greenback, ranging from a Persian carpet seller in Iran to a native tour guide in Africa.

    Did you know the British pound used to be king during the era of the gold standard? Times have changed, and now the US dollar, without a doubt, is the world's unofficial reserve currency and is the main currency accumulated as reserves by foreign central banks.

    Key commodities, most notably oil, which is the world's most important commodity and the most strategic asset, are denominated in the US dollars. Rich and developing countries alike must rely on oil to fuel the running of their expanding economies, and since oil is mainly priced in the US dollars, the oil-importing country - say, Japan - must convert its home currency of the yen to buy US dollars for the purchase of oil. Hence, there is naturally a wide global interest in the pricing of local currencies in terms of the US dollar.

    EXPAND BEYOND THE MAJORS

    When you trade the majors the most important concern is whether the current US dollar sentiment is bullish or bearish, with the outlook on the euro (EUR), the British pound (GBP), the Japanese yen (JPY), and the Swiss franc (CHF) taking the backseat. No matter how you analyze it, you can't escape making the decision on whether the US dollar is bullish or bearish that day. Focusing on just trading majors is fine, especially if you are a newcomer to foreign exchange trading, but if you have been trading forex for a while and are looking to expand beyond the majors, welcome to the world of currency crosses.

    With so many currency pairs available to trade, we can easily overlook other currencies not priced in terms of US dollars but may offer good trading opportunities. These pairs are known as currency crosses, whereby a non-USD currency is priced in terms of another non-USD currency, bypassing the US dollar. The exchange rates of these currency crosses are known as currency cross rates.

    Of all currency crosses, the most popularly traded are those that include the euro, and they are the EUR/JPY, EUR/GBP, and EUR/CHF. These three pairs have relatively high liquidity compared to other crosses. In fact, EUR/CHF may even be at times more liquid than USD/CHF, as the former is the pair of choice among institutional players who want to trade the Swiss franc. In fact, USD/CHF is generally a synthetic currency derived from EUR/USD and EUR/CHF.

    Return to January 2007 Contents

    Originally published in the January 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved.
    © Copyright 2006, Technical Analysis, Inc.