Currency is a medium that is used for exchanging goods and services, from one person to another. The most commonly known is the physical form of coins and paper notes.
Today most currency is held in non-physical, electronic forms contained in banks. Electronic money is known commonly as deposit money, cheques and debit cards. The electronic form has the advantage of quickly being able to be transferred from one person to another in a very short amount of time and over great distances.
Each government has its own currency system within its own economy. The performance of the country’s economy will generally be the main contributing factor which determines the worldwide value of its home currency.
Currency does not change in value when exchanged among itself, but when it must be converted from one currency to another, the value of each currency can rise/fall in value.
The difference in value between two countries currencies is called the exchange rate. Every time currency is converted from one to another, it is done so on the foreign exchange market, the biggest market in the world.
There are over 100 difference currencies located around the world at the moment. The most popular, or most liquid currencies are what are know as the ‘majors’ (USD, EUR, GBP, JPY, CNY, AUD, CAD, CHF). These are the currencies of the major economies around the world, each of their values are influenced by different factors and variables.
The United States Dollar (USD)
The United States Dollar, also known as the greenback, is America’s home currency, America has the largest and most technologically influential economy in the world making its currency very popular, so popular in fact, the USD is used as a standard to compare the value of other foreign currencies in the market today.
The USD value is influenced by so many different economic & political factors that come from within the country, to external events from right across the globe. The health of the US economy is used as an indicator of the overall health of the global economy.
The USD will actually go up in value in bad market conditions, because the USD is considered a “safe-haven” for money. So when the global economy is bad, investors will dump their money into USD’s until it is safe to invest in higher yielding currencies.
The Euro (EUR)
The Euro is the official currency of the European Union, a group of countries in Europe that have come together to adopt a common currency, collectively known as the Eurozone. The Euro was created with the intention of creating macroeconomic stability across the Euro-area, and to increase control over potential future inflation. The creation of the EURO also helped eliminate the currency exchange problems between the European countries. Trading with which each other became much easier when comparing prices of goods and services between them.
The Euro’s value is determined by a number of economic and political factors of the countries that make up the Eurozone. The main factors being Central Bank Policies & Interest Rates, trade balance (export profits minus import costs), inflation, debt levels, and GDP output of the Eurozone countries.
The Great British Pound (GBP)
The GBP, also known as pound & sterling. It is the home currency of the United Kingdom and is known as an asset class currency. Asset currencies are “higher risk, higher reward” currencies that attract investors to buy the Pound if they feel good about the currency market conditions and think the GBP will strengthen and rise in value. Some variables that affect the value of the Pound are interest rates, trade balance and demand for oil.
Higher interest rates make the currency more valuable increasing the demand for it, which drives up prices. When the interest rates are lowered, investors look to exit the British currency, driving prices down as the supply of the GBP sterling increases.
The GBP is also a largely backed by Crude Oil and Natural Gas, the supply and demand for these two commodities can have an effect on the value of the GBP. Crude oil prices are very volatile and spike up and down rapidly, any sudden spikes up or down in crude prices can influence the value of GBP.
The Canadian Dollar (CAD)
CAD belongs to the Canadian economy, another common name for the CAD is the Loonie. Canada controls the world’s 2nd largest reserve for crude oil in the world, making the CAD heavily influenced by the prices of oil. With the US being their largest customer for crude, it makes the USD/CAD market extremely volatile and difficult to work with, because of the extreme volatility of oil.
Other than the crude oil factor, the Canadian Dollar’s value is affected by the interest rates and central bank policies.
The Australian Dollar (AUD)
The official currency for the Commonwealth of Australia, a currency that offers the highest interest rates, making this currency a high demand asset class. Australia also has a huge mining industry, exporting a lot of precious metals, especially to their big trading partner China. So when the prices of commodities like gold and silver rise, this will drive up the price of the Aussie dollar.
Australia is exposed to the Asian economies, especially China. When China’s economy is booming, trade between the two flourishes and drives up Australia’s economy, therefore pushing up the value of the AUD. So good news in China is good news for the Aussie dollar. The inverse is also true, if China’s manufacturing slows down, the AUD suffers.
The Japanese Yen (JPY)
The JPY or Yen as it is called is the currency of Japan, the value of the yen is heavily affected by the Bank of Japan’s policies to try and maintain a weak Yen and stimulate economic growth by keeping interest rates near zero. Japan has a strong export industry, which benefits from a weaker Yen so that it is cheaper for other countries to buy Japan’s exports.
Unfortunately for the Yen, the market views the JPY as a safe haven currency. Meaning when global economy is down and suffering, investors like to place their money in the JPY driving up the prices of the Yen, forcing the hand of the Bank of Japan to intervene on the markets by selling trillions of yen. This act weakens the JPY so that Japan’s export industry doesn’t suffer from high yen rates.
The Swiss Franc (CHF)
The currency of Switzerland, known as the Swissy is considered the safest and most stable currency in the foreign exchange market. The biggest influence of the CHF is the inflation of the Swiss economy, if the Swiss National Bank decides to raise interest rates, investors may sell other assets elsewhere to invest into the CHF because of its safe reputation.
The other big influence on the Swiss Franc is the fact that 40% of the currency is supported by gold reserves. When the prices of Gold goes up, this can directly strengthens the value of the CHF.
Making money in the Forex Market
Traders make money trading in the foreign exchange market by investing in a currency they speculate will rise in value and sell them against currencies that are expected to weaken. In other words buying low, selling high, providing a profitable exchange rate. Retailtraders like you and me have access to leveraged money, meaning with $1000 you could be controlling $100,000 worth of currency, helping you increase your profit potential.
Forex trading isn’t something that you can just “pick up” overnight. In order to really make the most out of each and every dollar that you invest in this venture, you need a good education, a logical strategy like price action trading and the discipline to build a winning mindset. Don’t take this lightly, you’ve probably heard that most Forex traders lose money.
If you would seriously like to learn how to trade in the foreign exchange market. If you willing to dedicate yourself, and have realistic expectations and don’t need a Forex reality check, then check out our Forex price action trading course. Using price action, is the skill of reading the raw movements of the price on plain charts templates to accurately forecast the future movement of exchange rates. This allows you to position in early and turn a profit as the currency values move away from each other.
If you do decide to become a price action trader, and join the War Room I will see you on the other side. Otherwise I wish you the best of luck with your trading future.