Forex Encyclopedia: The 8 Most Traded Currencies

A major addition to any trader, investor or portfolio manager's toolbox. Let’s take a look at 8 currencies and their issuing country’s central banks that every trader or investor should know.

1. United States dollar (USD)

Central Bank: Federal Reserve (Fed)

The almighty dollar

The Federal Reserve (Fed), established in 1913 under the Federal Reserve Regulations, is the central banking institution of the United States. The system itself is led by a chairman and board of governors, focusing primarily on the branch, the Federal Open Market Committee (FOMC). The Federal Open Market Committee oversees open market operations and monetary policy or interest rates.

The current committee consists of 12 current Federal Reserve Bank presidents and 7 members of the Federal Reserve Board. The Federal Reserve Bank of New York York has been serving on the committee. Even with 12 voting members, nonmembers (including additional Federal Reserve bank presidents) are invited to share their views on the current economic situation when the committee meets every six weeks.

The U.S. dollar, sometimes called the "greenback, " is the national currency of the United States, the world's largest economy. Like any currency, the dollar is supported by economic fundamentals, including gross domestic product, as well as manufacturing and employment reports. However, the U.S. dollar is also broadly influenced by central banks and any interest rate policy announcements. The U.S. dollar is the benchmark against which other major currencies are traded, notably the euro, yen, and pound sterling.

2. Euro (EUR)

Central Bank: European Central Bank

The U.S. dollar’s archenemy

The European Central Bank, headquartered in Frankfurt, Germany, is the central bank of the 17 member states of the euro zone. Similar to the U.S. Federal Open Market Committee, the European Central Bank has one main body responsible for making monetary policy decisions, the Executive Committee, which is composed of five members and is led by a chairman. The remaining policy leaders were selected based on the consideration that four of the remaining seats are reserved for the four largest economies in the system - Germany, France, Italy and Spain - in order to ensure that the largest economies are always represented in the event of management changes. The committee meets approximately 10 times a year.

In addition to having jurisdiction over monetary policy, the European Central Bank also has the power to issue currency. Like the Fed, policymakers sometimes intervene when banks or systems fail. The ECB differs from the Fed in one important area: its primary goal is price stability, rather than maximizing employment and maintaining stable long-term interest rates, and its commitment to general economic policy is secondary. As a result, policymakers will turn their focus to consumer inflation when making key interest rate decisions.

Although the euro monetary system is somewhat complex, the euro is not complex. EUR/USD is less volatile relative to other major currencies such as GBP or AUD/USD. The average daily fluctuation range of the euro and US dollar is 30-40 points, and when the fluctuation range is larger, it is 60 points. Another thing to consider is time. Since the Forex market is open 24 hours a day, Forex traders must strategically plan their Forex trading schedule. Trading on the Euro currency pair is available during the London and US trading hours (2am to 11am EST).

3. Japanese Yen (JPY)

Central Bank: Bank of Japan

Technically complex, fundamentally simple

The Bank of Japan was established in 1882 and was the central bank of Japan, the world's second largest economy at the time. It was responsible for monetary policy, currency issuance, money market operations and data/economic analysis. The main monetary policy committee tends to work for economic stability, constantly exchanging views with the ruling government while striving for its own independence and transparency. The central bank holds 12-14 meetings each year and is led by a team of nine policy members, including two twice-appointed deputy governors.

The Japanese yen tends to be used in carry trades. The Japanese yen offers low interest rates and is used for trading against higher-yielding currencies, particularly the New Zealand dollar, Australian dollar and British pound. As a result, the Japanese yen tends to be more volatile, prompting FX traders to view the Japanese yen from a technical perspective over the long term. The average daily fluctuation is 30-40 points, and the maximum is 150 points. To try trading the Japanese Yen, focus on the overlap between the London and U.S. trading sessions (6 a.m. to 11 a.m. EST).

4. British Pound (GBP)

Central Bank: Bank of England

The Queen's Currency

As the main governing body in the United Kingdom, the Bank of England and the Federal Reserve echo each other. In the same manner as the Federal Reserve, the Bank of England has established a committee headed by the governor. The committee consists of 9 members, including 4 external participants (appointed by the chancellor), the chief economist, the head of market operations, the chief economist of the committee and 2 deputy governors.

The Monetary Policy Committee meets every month to decide interest rates and wider monetary policy, with the main goal being the overall stability of prices in the economy. Therefore, the Monetary Policy Committee set the benchmark for consumer price inflation at 2%. If this benchmark is breached, the governor is responsible for notifying the chancellor in writing by letter. In 2007, when the UK consumer price index rose sharply to 3.1%, the central bank governor took relevant measures. For the market, the release of this letter is often a precursor, as it increases the possibility of monetary policy contraction.

Compared with the euro, the pound is more volatile, with a wider daily average fluctuation range, which can reach 100-150 points, but 20 points is not uncommon. Movements in currency pairs to watch tend to give GBP a volatile character, with traders focusing on pairs such as GBP/JPY and GBP/CHF. As a result, the pound is likely to be most volatile during London and US trading hours, and least volatile during the Asian session (5pm to 1am EST).

5. Swiss franc (CHF)

Central Bank: Swiss National Bank

banker's money

Unlike other major central banks, the SNB is a public-private governing body. This belief stems from the fact that the Swiss National Bank is technically a specially regulated company. Therefore, more than 50% of the Swiss National Bank is owned by the Swiss state. This arrangement focuses on the economic and financial stability policies defined by the SNB's Governing Council. The SNB's board of governors is smaller than that of most central banks, with the heads of three major banks meeting quarterly to make monetary policy decisions.

The Board of Governors determines the range of interest rates (plus or minus 25 basis points).

The relationship between the euro and the Swiss franc is interesting. Similar to the Euro, the Swiss franc does not experience significant movements during any individual trading session. Therefore, the average daily fluctuation range of the Swiss franc is 35 points. Swiss franc during London trading hours (2 a.m. EST - a.m. 8 o'clock) usually has the largest trading volume.

6. Canadian dollar

Central Bank: Bank of Canada

Looney

The Bank of Canada was created under the Bank of Canada Act of 1934 and is responsible for "focusing on low-level and stable inflation objectives, a safe and stable currency, financial stability and the effective management of government funds and public debt." The Bank of Canada acts independently and has similarities to the Swiss National Bank in that it is sometimes considered a company in which the Treasury directly owns shares. Although the government's interests are closely related, the central bank governor also has the responsibility to maintain a certain distance from the current government and promote long-term price stability while taking into account the government's concerns. The Bank of Canada's inflation target is 2-3%, and it tends to be hawkish rather than dovish on any deviations in prices.

The Canadian dollar remains in contact with major currencies, with an average daily fluctuation range of 30-40 points. Many currency prices move in line with commodities, but one unique aspect of the Canadian dollar is its relationship with crude oil. Canada is a major exporter of commodities, so a large number of traders and investors use the Canadian dollar to hedge current commodity positions, or for pure speculation, following signals from the oil market.

7. Australian Dollar/New Zealand Dollar (AUD/NZD)

Central Bank: Reserve Bank of Australia/Federal Reserve Bank of New Zealand

Has always been a favorite among arbitrageurs

The interest rates offered by the Reserve Bank of Australia are among the highest among major global markets, and its long-term plans have always been based on price stability and economic growth. The Board of Governors of the Central Bank is composed of six members headed by the Governor, as well as a Deputy Governor and a Finance Minister. They work together to keep inflation between 2-3% and meet nine times a year. Likewise, the Reserve Bank of New Zealand is pushing for an inflation target, hoping to use this as a basis for prices.

Both currencies are a focus for carry traders as the AUD and NZD offer the highest yields of the 7 major currencies on most platforms. Therefore, if deleveraging occurs, these pairs will experience volatility. In addition, like other major currencies, the Australian dollar and New Zealand dollar have an average daily fluctuation range of 30-40 points. Both currencies have strong ties to commodities, most notably silver and gold.

8. South African Rand (ZAR)

Emerging opportunities

The South African Reserve Bank was formerly modeled after the Bank of England and is South Africa's monetary regulator. Its main responsibilities are similar to those of other central banks. The South African Reserve Bank is also known as the creditor, clearing bank and main gold custodian in some cases. Most importantly, the central bank is responsible for “achieving and maintaining price stability, ” including intervening in Forex markets when unexpected events arise.

Interestingly, the South African Reserve Bank is still a completely private institution with more than 600 shareholders, all of whom hold less than 1% of the total share capital. This is to ensure that South African interests take precedence over any personal interests. In order to maintain this policy, the Governor and the 14-member Board of Directors are responsible for the operations of the central bank and are committed to achieving monetary objectives. The Board of Directors holds 6 meetings per year.

The average daily fluctuation range of the South African Rand can reach up to 1, 000 points, and the volatility is relatively high. But don’t be fooled by the large swings, as when converted into USD pips, the swings are comparable to those of the British Pound, making the South African Rand USD a good currency pair (especially when considering the arbitrage potential). Traders also consider the South African rand's relationship with gold and platinum. South Africa leads the world in exports of both metals, so it's only natural that there would be a similar link between the two as the Canadian dollar vis-à-vis crude oil. Therefore, in the absence of economic data, consider the opportunities created by commodity markets.

Conclusion

As financial markets continue to develop and grow around the world, Forex and currencies will play an increasingly important role in daily transactions. The nominal trading volume of the Forex market averages over US$5 trillion per day. Therefore, whether it is currency exchange for physical trade or simple portfolio diversification, Forex continues to provide more opportunities for retail and institutional investors.