eToro – Forex Trading Forum

[djsheckie]

I'm starting a series on each of the main currencies and the fast facts you should know about each. I figured the easiest to start with would be the dollar.

United States Dollar (USD)
Central Bank: The Federal Reserve Bank
Current Interest Rate Information: http://www.federalreserve.gov/releases/h15/data.htm

In 1913, the Federal Reserve System (sometimes refered to ad the Fed)was founded by the Federal Reserve Act. The Fed is the central banking body of the U.S. The body is headed up by a chairman and board of governors, with the main focus is centered around the branch known as the Federal Open Market Committee (FOMC). The FOMC supervises open market operations as well as monetary policy or interest rates.

[djsheckie]

Currently, the committee includes five of the twelve current Federal Reserve Bank presidents and seven of the Federal Reserve Board members, with the Federal Reserve Bank of New York always serving on the committee.

While there are twelve voting members, the non-members (which includes the additional Fed Bank presidents) are also called upon to voice their opinions on the current state of the economy when the committee meets every six weeks.

Sometimes referred to as the greenback, the U.S. dollar (USD) is the designated currency of the planet's largest economy, the United States.

So what makes the dollar tick? What makes the dollar move? Well cover that in our next post.

[djsheckie]

As with any currency, the dollar is supported by certain standard fundamentals, including gross domestic product, and manufacturing and employment reports. However, the U.S. dollar is also subject to influence 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.

Now we'll moove onto discussing the Euro.

European Euro (EUR)
Central Bank: European Central Bank (ECB)
Current Interest Rate: http://www.ecb.int/stats/monetary/rates/html/index.en.html

With headquarters in Frankfurt, Germany, the European Central Bank is the central bank of the fifteen member countries that comprise the Eurozone.

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In similar fashion to the United States' FOMC, the ECB has a main board of representatives which they rely upon for making monetary policy decisions.

Known as the Executive Council it is composed of five members and headed up by a president. The remaining policy heads are carefully decided upon while four of the remaining seats are reserved for the four largest economies in the system, which currently include Germany, France, Italy and Spain. This is to ensure that the largest economies are constantly being represented in spite of a change in administration. The Executive council meets approximately ten times a year.

[djsheckie]

Aside from having control over monetary policy, the European Central Bank also holds the right to issue banknotes as it sees fit. Similar to the Federal Reserve, policy makers can interject at times of bank or system failures. The European Central Bank differs from the Fed in an important area: rather than try to maximize employment and maintain the 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 instead shift their attention to consumer inflation in making key interest rate decisions.

[djsheckie]

While the governing body is somewhat complex, the currency isn't. When trading against the U.S. dollar, the euro has a tendency to be a slower currency at least when compared to its counterparts (i.e., the British pound or Australian dollar). Generally speaking, the base currency can trade anywhere between thirty to forty pips, with more volatile swings averaging slightly more, somewhere around sixty pips wide per day.

Another big trading factor is of course time. You'll see euro-based pairs being traded predominately during the London and U.S. sessions (These sessions run from 2am through 11am EST).

That pretty much covers the basics of the Euro so next up we have the Yen...

[djsheckie]

The Japanese Yen (JPY)
Central Bank: Bank of Japan (BoJ)
Current Interest Rate: http://www.boj.or.jp/en/index.htm

While the Yen can be technically complex, it's fundamentally simple. What do I mean? Japan's central bank was founded all the way back in 1882. Known simply as the Bank of Japan it serves as the central bank to the world's second largest economy. The BOJ governs monetary policy as well as the issuing of currency, money market operations and data as well as 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 at least a dozen times a year, the governor leads a team of nine policy members, including two appointed deputy governors.

[djsheckie]

It's important to know that the Japanese yen (JPY) tends to trade under what's known as a carry trade component. The Yen offers a low interest rate, and is pitted against higher-yielding currencies, primarily the New Zealand and Australian dollars and the British pound. As a result, the underlying tends to be more volatile, and usually pushes traders to take technical perspectives on a longer-term basis. Average daily ranges are in the region of thirty to forty pips, with extremes as going as high as a hundred and fifty pips! If you are looking to trade the Yen with a little bit of a bite, then focus on the crossover of London and U.S. hours between 6am - 11am Eastern Standard Time.

[djsheckie]

Well that pretty much covers what you need to know about the setup of the Yen now we'll move onto one of the best known currencies - the British Pound.

Great British Pound - GBP
Central Bank: Bank of England - BoE
Current Interest Rate: http://www.bankofengland.co.uk/

The Bank of England is the main governing body in the United Kingdom, and it also serves as the monetary equivalent of the United States' Federal Reserve System. In the same fashion, the governing body establishes a committee headed by the governor of the bank. The committee is comprised of nine members, and included on the committee are four external participants (appointed by the Chancellor of Exchequer), a chief economist, director of market operations, committee chief economist and two deputy governors.

[djsheckie]

The committee meets every month or in other words twelve times a year. The Monetary Policy Committee (MPC) sets the interest rates as well as broader monetary policy, with their primary focus being total price stability in the economy.

As such, the MPC also has the consumer price inflation set at 2%. If this number is exceeded, then the governor has the responsibility to notify the Chancellor of Exchequer. This is done via a letter, one of which came in 2007 as the U.K. when the Consumer Price Index rose sharply to 3.1%. The release of this letter is an important indicator for traders and markets, as it highlights an increased probability of contractionary monetary policy.

[djsheckie]

It is a little bit more volatile than the euro, the pound (aliases: GBP, and also sometimes referred to as pound sterling or cable) tends to trade a wider range through the day. The pounds average swings can cover anywhere from a hundred to a hundred and fifty pips. However, it also isn't unheard of for the pound trade as narrowly as twenty pips. Swings in notable cross currencies tend to give this currency a more 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.

[djsheckie]

The 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

This Swiss Franc is really more of a banker's currency. Why do I say that? Well, as opposed to all the other major central banks that we've covered so far, the Swiss National Bank is viewed as a governing body with private and public ownership. The reason for this stems from the fact that the Swiss National Bank is technically a corporation which is under special regulation. Due to this setup a little over half of the governing body is owned by the sovereign states of Switzerland.

[djsheckie]

This setup serves to enhance both the economic and financial stability policies dictated by the governing board of the Swiss National Bank. While it's smaller than many of the other governing bodies, the SNB's monetary policy is set by three major bank heads who meet to dicuss matters on a quarterly basis.

Like the euro, the Swiss franc rarely makes big 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 which runs form 2am - 8am Eastern Standard Time.

[djsheckie]

Canadian Dollar- CAD
Central Bank: Bank of Canada - BoC
Current Interest Rate: http://www.bankofcanada.ca/en/rates/interest-look.html

The Canadian Dollar is funnily enough also known as the loonie. The Bank of Canada was established in 1934 by the Bank of Canada Act and serves as Canada's central bank. The BOC is 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." Since it acts independently, the Canadian central bank is often compared to the Swiss National Bank because it is sometimes treated as a corporation, with the Ministry of Finance directly holding shares.

[djsheckie]

Despite the government involvement and interests, it is the responsibility of the bank's governor to promote price stability while keeping a distance from the current administration, but at the same time keeping track of the government's concerns. The BoC has an inflationary benchmark of 2-3%, and it's worth noting that the Bank of Canada has generally remainedn more hawkish rather than accommodating when it comes to any deviations in prices.

Keeping in touch with major currencies, the Canadian dollar tends to trade in similar daily ranges of 30-40 pips. However, one unique aspect about the Candain dolar is its direct relationship with crude oil news and prices, since Canada is still a major exporter of oil.