There are many different pairs, or combinations of currencies, that are traded in currency markets across the globe. Among them are the four very liquid pairs that are traded against the U.S. dollar (USD), known as the majors. These pairs trade well on fundamental news related to the United States and its respective zones, such as economic releases and large corporate actions. They also trade based on technical analysis cues, which is thought to work well in the extremely large forex market.
This week, we will look at some fundamental news that has, or could have, an impact on the future pricing of these pairs.
The Euro
The euro gained more that 50 pips from an open below 1.3300 to close above 1.3350 against the USD today, as the bailout of U.S troubled automakers didn't make it through the Senate. Nervousness that a bankruptcy for these companies would be detrimental the the American economy seems to be having a detrimental effect on the USD. The EUR/USD pair closed the week up over 500 pips from its open at $1.2914. With continued worry over the condition of the U.S. economy going forward, traders looking to profit on this pair may be best suited not to buck the trend and maintain a long position in this currency.
In the spot markets, the euro trades against the USD in the currency pair EUR/USD, with the euro being the base currency quoted in USD. The CurrencyShares Euro Trust (NYSE:FXE) tracks this pair, and can be used to take a position for or against the strength of the euro in relation to the USD. One share of the CurrencyShares Trusts, is equivalent to purchasing US$100 of the EUR/USD pair; and so, for example, a 100 share long position in FXE, is equivalent to a long position in the EUR/USD pair to the amount of US$10,000 (often known as 1 mini-lot). The CurrencyShares Trusts are a great way to trade the forex market through your regular investment accounts. (Be sure to check out the answer to our frequently asked question, Why isn't the EUR/USD currency pair quoted as USD/EUR? to learn more about the structure of currency pairs.)
The British Pound
The Bank of England currently has its central bank rate at 3%, which is much higher than the U.S.'s current 1%, which just adds to the same situation seen in the EUR/USD pair. The trade for the pound versus the dollar has become stronger, with a large interest rate differential helping along the way. Traders looking to take advantage of the current dollar weakness, and the Federal Reserve's decision to continue to lower interest rates, should be looking at the pound to take advantage.
The pound remained fairly flat against the USD this week, gaining just over 100 pips, finishing the week just under $1.5.
The pound, like the euro, trades against the USD in a currency pair (GBP/USD) where it is the base currency, quoted in U.S. dollars. The CurrencyShares British Pound Sterling Trust (NYSE:FXB) tracks this pair in the same way, with one share being equivalent to purchasing US$100 of the GBP/USD pair.
The Japanese Yen
Trading volume in the Japanese yen versus the USD should be expected to increase as it is the best pair to track a weakening U.S. economy and dollar and the overall risk aversion of traders and investors alike in the current climate. As the long-time USD/JPY carry trade continues to unwind, the bulls of this pair have seen a quick and drastic turnaround in its direction. Continued flight from the long side of this pair as the Federal Reserve continues to lower interest rates should help to continue the downtrend for the longer term.
This week, the yen gained strength against the USD, moving up over 150 pips, dropping from 92.77 yen to below 91.00 yen. Because of recent volatility, traders may wish to wait for confirmation of the Bank of Japan's decision to start the interest rate normalization process before hopping on this momentum trade.
Based in U.S. dollars, the Japanese yen trades in a currency pair (USD/JPY) where it is the quote currency, rather than the base currency. The CurrencyShares Japanese Yen Trust (NYSE:FXY) tracks the opposite of this pair and at a multiple of 1,000, so purchasing 1 share of FXY is equivalent to shorting US$1,000 of the spot pair.
The Swiss Franc
The USD/CHF currency pair, tends to be negatively correlated with the EUR/USD, as the CHF and EUR have a strong positive correlation. Because of this correlation, it is always a good idea to compare the moves of the two pairs to ensure future moves are being predicted correctly. With the EUR/USD breaking above a triple top resistance this month, it seems necessary to see if the USD/CHF has broken below its support. A quick look at this pair's chart shows us that the price has yet to break below the triple top resistance, and as the euro usually leads the franc, traders may look to catch a little more downside in this pair.
This past week, the franc has gained some strength against the USD, along with all the other pairs, with a move of almost 350 pips from the open at 1.2096 francs.
Like the yen, the franc's spot pair, USD/CHF, is quoted in its own currency rather than the USD. The CurrencyShares Swiss Franc Trust (NYSE:FXF), like the other CurrencyShare Trusts, is quoted in dollars. Much like with the yen, purchasing shares of FXF is equivalent to short selling the spot pair because of the opposite quote currency. Unlike the yen, though, the multiple is only 100, so purchasing 1 share of FXF is the same as shorting US$100 of the USD/CHF currency pair.
To learn more about the forex markets, check out Investopedia's Forex Special Feature and Investopedia's Forex Trading Guide.
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