Forex trading is a way to diversify a trader’s portfolio. It’s also a very profitable business that can offer a trader opportunities to make money. But what are the best currencies to trade? Here is a list of the top five:
1. U.S. Dollar (USD)
2. European Euro (EUR)
3. Japanese Yen (JPY)
4. British Pound (GBP)
5. Swiss Franc (CHF)
Today we will analyse the U.S Dollar and the Euro, the two most traded currencies in the world, while tomorrow we will take a look to the remaining three.
1. U.S. Dollar (USD)
The U.S. dollar, also known as ‘the greenback’ was introduced in 1913 by the Federal Reserve Act issued by the Federal Reserve, the central bank of the United States. The monetary policy is decided by the Federal Open Market Committee (FOMC), which supervises open market operations as well as the monetary policies.
The current FOMC 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.
The dollar is the national currency of the world’s largest economy, the United States of America. As with any currency, the dollar is supported by economic fundamentals, including GDP, consumption, investment and employment.
The dollar is widely influenced by the Fed’s monetary policy and announcements about interest rate policy. The dollar is a benchmark that trades against other major currencies, especially the euro, Japanese yen, and British pound. The basket of currencies against which the dollar is traded forms the famous “dollar index”.
2. Euro (EUR)
The Euro is the currency which circulates in the eurozone, made of all the 19 member states that adopt the euro, also known as the “single currency”. It is governed by the Frankfurt-based European Central Bank (ECB). The committee responsible for monetary policy decisions is the ECB’s Executive Board, which is composed by four members plus a president and vice-president.
The remaining policy heads of the ECB are chosen with the consideration that four of the remaining seats are reserved for four of the five largest economies in the system, which include Germany, France, Italy, Spain, and the Netherlands.
The ECB differs from the Fed as for the goals it has to achieve: the Fed aims to maximize employment and maintain the stability of long-term interest rates, while the ECB aims only to price stability. As a result, policymakers will turn their focus to consumer inflation in making key interest rate decisions.
Although the monetary body is somewhat complex, the currency is not. Against the U.S. dollar, the euro tends to be a slower currency compared to the British pound or Australian dollar. On an average day, the base currency can trade within a range of 30-40 pips, up to 60 pips, in more volatile days.
Euro-based pairs can be traded during the overlap of London and Wall Street sessions, from 2 a.m. through 11 a.m. EST.
3. Japanese Yen (JPY)
Established in 1882, the Bank of Japan is the Japanese central bank. It governs monetary policy as well as yen issuance, money market operations, and data/economic analysis. The Monetary Policy Board works in order to achieve economic stability, constantly exchanging views with the reigning administration, while simultaneously working toward its own independence and transparency. Meeting 12 to 14 times a year, the governor leads a team of nine members, including two appointed deputy governors.
The yen is commonly traded as a ‘carry trade currency’. As the BOJ usually offers a low-interest rate to the market, the yen is used by investors to buy higher-yielding currencies, mostly the New Zealand and Australian dollars and the British pound. As a result, the underlying tends to be very erratic. Average daily swings are in the range of 30 to 40 pips, with extremes as high as 150 pips. To trade the yen traders focus on the crossover of London and U.S. hours (2 a.m. to 11 a.m. EST).
4. British Pound (GBP)
The Bank of England is the central bank of the United Kingdom, established on the same model of the Federal Reserve. The Council of Directors appointed by the Queen establishes a committee headed by the governor and composed by five executive members and as many as nine others. The committee includes the chair and deputy chair and others appointed by the Chancellor of Exchequer.
The Council meets at least eight times a year, the Monetary Policy Committee (MPC) takes monetary policy decisions, aiming to achieve price stability in the British economy. The MPC has a benchmark of consumer price inflation set at 2.0%. If this 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 jumped to +3.1%. The release of this letter tends to be a warning to traders, as it signals a likely contractionary monetary policy.
The pound, also referred to as ‘sterling’ is a stable currency, slighlty more volatile than the euro, and is traded within a middle range through the day. Swings are usually by 100 to 150 pips but it isn’t unusual to see narrow swings by 20 pips. Swings in notable cross currencies tend to give this major a volatile nature, with traders focusing on pairs like GBPJPY and GBPCHF. That’s why the pound can be seen as most volatile through both London and U.S. sessions, with minimal movements during Asian hours (7 p.m. to 4 a.m. EST).
5. Swiss Franc (CHF)
Unlike all the other major central banks, the Swiss National Bank (SNB), the central bank of Switzerland, has both a private and public ownership. The SNB is technically a corporation under special national regulation. More than a half of the SNB capital is owned by the sovereign cantons of Switzerland. This particular structure determines the economic and financial stability policies dictated by the governing board of the bank. Monetary policy decisions are taken by three major bank heads who meet on a quarterly basis. The governing board takes decision on the monetary band (+ or – 25 basis points) where the interest rates fluctuate.
The Euro and Swiss Franc have an interesting relationship. Like the euro, the Swiss franc hardly makes significant moves in any of the individual sessions. As a result, traders look for this 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 (2 a.m. to 10 p.m. EDT).