The Forex Market is the biggest Financial Market in the World. Daily transaction volume is reported by the Bank of International Settlement (April 2019) to be $ 6.60 trillion. Remarkably, 80 % of this Volume is in the US$ against the other 6 Major Currencies. So, what are the top 7 Major Forex Currencies and what should we know about them to trade successfully?
The 7 Major FX Currencies
Listed by the volume of trading transaction executed on an average daily basis, the ‘major’ Forex currencies are:
United States Dollar US$ USD
Euro € EUR
Japanese Yen ¥ JPY
British Pound £ GBP
Australian Dollar A$ AUD
Canadian Dollar C$ ` CAD
Swiss Franc CHF CHF
The table above list the commonly used Currency Symbol and the ISO standard trading symbol.
All Currencies are Traded against another currency. As such you would always trading a ‘pair’. An example of this is the US Dollar against the Euro. This is the most commonly traded ‘pair’ and is known as EUR/USD or in everyday parlance ‘Euro/Dollar’.
There are 8 Major Cross-rate ‘pairs’
All currencies will have a value against the US Dollar. Indeed, EVERY currency will have a value against each other. The ‘major’ currency pairs that are most actively traded are:
EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/GBP, EUR/YEN, AUD/USD, USD/CAD
These pairs provide the most liquidity and as such are the most actively traded. This is driven not just by speculator activity but also the fact that, China aside, most trade happens between these countries.
The United States Dollar ($) USD
The US$ was established in 1792 as the official currency of the United States. The Coinage Act of that year created a decimal currency with each 1 $ split in to 100 cents. The $ was denominated into the following coins: a Dollar, a Half Dollar (50 cents), a 1/4th Dollar (25 cents), a 1/10th Dollar (10 cents), a 1/20th Dollar (5 Cents) and 1/100th Dollar (a cent).
Over time these gained popular slang names.
The 1 cents coin was known as a ‘penny’
5 cents – a nickel
10 cents – a dime
25 cents – a quarter
50 cents – a fifty cent piece
There are the following notes now in circulation; the $1, $2, $5, $10, $20, $50 and $100 bills.
Why is the US$ the Un -Official Global Reserve Currency?
The US$ is the unofficial global reserve currency. When ever there is any sort of crises in the world investors tend to put their money in US$ denominated assets. This may be US Treasury Bonds, or Gold. Basically, any investment that they consider is good protection against any threat to their cash reserves. This is called ‘flight to quality’ where in times of anxiety or global economic meltdown investors protect their cash. By investing in US Treasury Bonds they get a ‘guaranteed’ return in their money. Gold is though to be a great protector against inflation as the price and value is not affected by inflation (over time).
All these things make the US$ the most attractive and widely traded currency. Indeed, it was reported in the latest Triennial Forex Report by the BIS that 88% of all FX transactions involved the US$.
Key Drivers to the Value of the US$ in Forex Markets
Two Key Factors drive the demand for the US$;
The Strength of the Economy – the demand for US Assets, like Stocks, Bonds, Real Estate
Interest Rates – the yield of US$ based deposit or Fixed Income Bonds
In the short-term the US$ will rise and fall on normal supply and demand factors. Daily transaction by commercial buyers and sellers, plus investors buying and selling US$ assets. In addition, short-term market movement are driven by Market Sentiment. This is when speculators look at News and Fundamental Economic Data and take a view on future prices. If they see the Economy is strong, that could indicate a rise in demand and as such prices. Higher process, being inflationary would need to be controlled by higher interest rates. This is very positive for the US$ as a higher yield would attract investors to hold US$ deposits.
Therefore, the release of Economic Data is so important in driving the future price of all markets. The comparative difference in Interest rates between two currencies a major driver of cross-rates. And predicted the future direction of US Interest Rates is one way speculators can profit from price changes.
The Euro (€) EUR
The Euro became the single European Currency in January 1999, the concept having been announced in 1995. It took the intervening 4 years for the 14 states that took up the change to prepare for its introduction. The initial transition was purely a bookkeeping exercise before the full physical transition to notes and coins in January 2001. By March of the same year there were no longer Deutsche Marks or French Francs etc. The new Euro was fully adopted and trading on the Foreign Exchange began in earnest.
The 14 Countries That First Converted to the Euro
The first countries that converted to the Euro did so at a fixed rate on December 31st, 1998. The following table show the initial 14, their original Currency and the rate at which they converted:
Austria Austrian schilling 13.7603
Belgium Belgian franc 40.3399
Holland Dutch guilder 2.20371
Finland Finnish markka 5.94573
France French franc 6.55957
Germany German mark 1.95583
Ireland Irish pound 0.787564
Italy Italian lira 1,936.27
Luxembourg Luxembourgish franc 40.3399
Monaco Monegasque franc 6.55957
Portugal Portuguese escudo 200.482
San Marino Sammarinese lira 1,936.27
Spain Spanish peseta 166.386
Vatican City Vatican lira 1,936.27
Cyprus, Estonia, Greece, Latvia, Lithuania, Malta, Slovakia and Slovenia also converted at various times after inception. For more information see EU Countries and The Euro.
Euro Coins & Notes
The Euro, like the US$ is denominated into 100 cents. There are 1c, 2c, 5c, 10c, 20c and 50c pieces and also €1 and €2 coins.
There are also a number of Notes in general circulation; the €5, €10, €20, €50 and €100 notes. There is also a €200 and a €500 note, but these are rarely used.
Key Drivers to the Value of the Euro in Forex Markets
Demand for the Euro is extremely hard to assess given the diversity of the different countries in the union. Where Economic growth and demand is easy to assess when analysis the US or UK, It is much harder looking at the Eurozone. Interest rates differential have certainly played a big role in the Euro’s fall since 2015. As interest rates fell in the Eurozone and rose in the US the Euro fell over 20% for around $1.40 to current levels around 1.12. Indeed, the market had a low below 1.05 and parity in 2020 is definite possibility.
With Germany and France being by far the biggest Economies in the Eurozone, Economist tend to focus on data from these two countries. As the German and or French Economies strengthen or weaken, so does the outlook for the Euro change. Given the complexity of the Currency the Euro is not seen as a safe haven currency. As such when there is political or economic turmoil the Euro tends to suffer.
One reason the Euro still holds its value is that European Companies tend to use the Euro as a ‘reserve currency’. Indeed since the introduction of the Euro in 2001, the Euro was home to 25%-30% of all currency reserves. This has dropped of to around 20% since the devaluation of the last 4 years. If the Euro was to drop below $1.05 and below parity, this is likely to drop even further.
The ECB are the ultimate caretakers of the Euro and its valuation. With interest rates at zero and Economic growth not much higher a devaluation of the Euro has positive attributes. Not least amongst these is that a lower Euro could make European products cheaper to export and Europe an attractive tourist destination. Keeping a close eye on the ECB’s rhetoric around the Euros’ value is vital in assessing its future value. If the ECB wants the Euro lower, it will go lower.
The Japanese Yen (¥) JPY
The Yen is ranked the third most traded currency in the Forex Market behind the US$ and Euro. This largely to do with the huge volumes of International Trade Japan does Globally. This provides not only liquidity but also volatility to the market. Two attractive attributes to the currency speculator.
The following chart shows the $Yen cross rate over the last thirty years.
As you can see……
The History of the Yen
The Yen was established as the National Currency of Japan by the 1871 New Currency Act. The single Yen was then defined as 1.5g of Gold around 0.05 an oz which is about $75 in todays value. Various private banks were mandated to issue the currency, but this proved cumbersome. As such the Bank of Japan (BoJ) was established in 1882 which then took sole control of minting the new currency.
The Yen suffered great volatility during the war years in line with the collapsed economy of Japan. To stabalise the economy the Yen was fixed at ¥ 360 per $1 thru the Bretton Woods System. There followed an unprecedented investment and growth in the Japanese economy. The low value of the Yen made Japanese exports extremely attractive and with this the demand for the currency.
By the end of the 1970’s the Yen had appreciated to only ¥227 to the US$. The Economy continued to grow and the advanced technology, especially in the Automotive and Electronics sectors, spurred exports higher. The Yen was at ¥128 in 1988 and as low (actually HIGH) as ¥95 by the mid 90’s.
This huge appreciation was stalled following the huge economic slow-down Japan suffered in the early to mic-90’s. Today the $Yen is about ¥110.
Yen Notes and Coins in Circulation
Japan, for all of it innovations in technology is still very much a cash society. Its though thought that the Japanese enjoy the anonymity of the cash-based transaction. Depending on what source you might read its though in general 20% of all transaction are still in cash. This number is well over 30% in the 65 year+ demographic. This compares to less than 15% in the UK and 10% in other Asian countries like Korea.
There are currently the following coins in common circulation; the ¥1, ¥5, ¥10, ¥50, ¥100 and ¥500 coins.
In addition, there are four notes in use; the ¥ 1,000, ¥ 2,000, ¥ 5,000 and ¥ 10,000 notes
Key Drivers to the Value of the Japanese Yen in Forex Markets
For many years the Bank of Japan (BOJ) tried to artificially manage the value of the Yen. To keep the relative value of the currency on the ‘weak’ side can keep export prices competitive. Eventually the wealth of Japan rocketed thru the 60’s, 70’s and 1980’s and the Yen boomed.
BOJ sentiment is still potentially big driver to medium to long term Yen valuations. Comparative Interest rates are also important to analyse as well as normal economic growth (GDP) and technical considerations.
The British Pound (£) GBP
The fourth most commonly traded currency in the Forex market is the British Pound (GBP). The Pound is sometimes referred to as ‘sterling’ and the GBP/USD (£$) cross-rate, as ‘Cable’.
What is the Origin of Sterling, Cable and the Quid?
The term ‘sterling’ originates for Anglos Saxon times when a Pound of Silver would be the combined weight of 240 Silver Pennies. These Pennies where referred to as Sterling’s, hence Pounds (of) Sterling.
The term ‘Cable’ (apparently) originates from the fact that during the 1800’s and the early day of International Trade, the price of the US$ against the Pound was transmitted via the Transatlantic Cable. GBP/USD traders are often referred to as ‘cable’ traders.
Another term often associated with the British Pound is the name ‘quid’, as in ‘that’s 10 quid, please’. This term is thought to derive from the Italian ‘quid pro quo’, which literally mean ‘what for what’. Italian immigrants where thought to intimate ‘how many (quid) for this or that?’. It became ‘this many ‘quid’ or that many ‘quid’.
Pre – Decimal Coinage
From those Anglo-Saxon beginnings back in the 8th Century, a Pound (of weight) continued to be split into 240 pennies. Indeed, a Pound (currency) was 20 shillings, each of 12 silver pennies. Right up until 1971, when the UK finally went decimal, the currency was in Pounds (£), Shillings (s) and Pence (d). The ‘s’ and ‘d’ for Shillings and Pence were derived from the Roman solidus and denarius coinage.
Post Decimalisation GBP Notes and Coins
Decimalisation in 1971 finally broke the Pound in to 100 pieces, know as the New Penny. The following coins are now in circulation:
The 1p, 2p, 5p, 10p, 20p, and 50p pieces. Also the £1 and £2 coins.
There are £5, £10, £20 and £50 notes
Key Drivers to the Value of the British Pound in Forex Markets
The United Kingdom ranks as the 6th largest economy in the world. Its Service Sector makes up 75% of GDP and rank sonly 10th largest exporter in the world.
Trading the GDP has been largely driven by the ‘safe-haven’ sterling provides being out of the Euro. Interest rates are also a key drive to demand, as is the demand for Government debt (gilts). The UK stock market is the 7th largest in the world so any demand for UK stocks is good for the GBP.
The biggest driver is ‘expectations’ of future Interest Rates. Higher interest rates (it is assumed) should be good for the British Pound, but the reality is usually different. Higher rates in the UK tends to hit the majority of the homeowners in the UK as it increases mortgage liabilities. This takes cash out of pocket and impacts consumer spending, profits and stock valuations. Higher rates also slows spending as saving becomes more attractive. This has a negative impact (over time) on the GBP.
The Australian Dollar (A$) AUD
Originally know as the Australian Pound it was based, although not equal in value to, the British Pound. Then in 1959, the Australian Treasury decided that he British Pounds, Shillings and Pence system was outdated and voted to decimalize the national currency. It was announced in 1965 that the new currency was to be named the ‘royal’. This was met with widespread public disapproval and by the launch in February 1966 the Australian Pound became the Dollar.
The Australian Dollar was originally pegged to the value of the US$ at rate of US$ 1.12. An appreciating in the buying power of the A$ saw that peg raised to $1.4875 in 1973 before the decision to flout was taken in 1983.
The Australian $ is now the 5th most actively traded Forex currency. Since floatation the value has fallen dramatically, reaching an historic low of $0.4775 in 2001. By the Bond Crisis and financial melt down in the US in 2008 the A$ had risen back to around the $ 0.95 cents. Reaching parity (1AUD=1USD) in 2010 has largely traded back in the mid 80cents range since.
Australian Notes & Coins
Whilst there was originally a 1 cent and 2 cents piece, these where withdrawn in 1992. Currently there are 5c, 10c, 20c, 50c and A$1 and A$2 coins.
In addition there are A$ 5, A$ 10, A$ 20, A$ 50 and A$ 100 notes in circulation.
Key Drivers to the Value of the Australian $ in Forex Markets
The Australian Economy is very commodity driven. According to OEC (the Observatory of Economic Complexity) The Top 5 Australian Exports are Iron Ore, Coal, Gold, Petroleum Gas and Wheat. As such demand for these products are a key driver to the Australian Economy and in turn the currency. Interest rate differentials (against the US$, Euro, Yen and British Pound) also play a key role of driving demand for the A$. As demand for A$ deposits rise, so does the value of the currency.
The Canadian Dollar (C$) CAD
The Canadian $ ranks as the 5th largest ‘reserve currency’ in the world and 6th most actively traded. The stability of its Economy and strength of its Sovereign debt (Government Bond Market) make the CAD$ an attractive currency. Up until the 1850’s the local currency was still Sterling and tied to London. However, as increased trade with their American neighbors proved cumbersome with this regime , a change was needed. As such a Currency more in line with the American system and in 1858 the Canadian Pound was switched to the decimal Canadian $.
Canadian Notes & Coins
Since 2000, there has been the following Canadian Coins minted; the 1c, 5c, 10c; 25c and 50c coins. By 2012 a $1 and $2 coin were also introduced.
The Canadian $ notes are C$ 5, C$10, C$ 20, C$ 50 and $100.
Key Drivers to the Value of the Canadian $ in Forex Markets
The Canadian $ is thought of as a ‘commodity’ currency such is the economy driven by the commodity exports. Often seen as a good option to the US$ you often see a demand for the C$ when there is political turmoil in the US. This is especially true is the yield on European Currencies are low, as they are now.
The slow growth in the US followed by the Financial Crisis of 2008 saw the Canadian $ rise sharply from 2002 to 2012. In these period the US$ fell from $1.60 to under par, trading as low as 95cents. The market is now in the middle of that huge range, around 1.30. In an election year, and continued political uncertainty the Canadian $ would seem to be an attractive investment going forward.
The Swiss Franc (CHF) CHF
Whilst only the 20th biggest economy in the world in 2019 it is ranked 2nd only to Luxembourg by GDP per Capita. The Swiss Economy is historically very stable driven largely by its ever-growing tourist sector and strong Financial Services. Switzerland is also well known of course by its clock and watch industry where it is seen as a world leader.
Switzerland are of course not part of the Euro. However, in the 1860’s they were part of another currency union, that of the Latin Monetary Union of 1865. This is when Belgium, France, Italy and Switzerland agreed to value their currencies at a fixed 4.5 grams of Silver. This stood until the 1920’s and even then the Swiss Franc was the standard.
Post war the value of the Swiss Franc was determined by the Bretton Woods Agreement and fixed at CHF 4.305 to the USD.
Swiss Franc Notes & Coins
The Swiss Franc is divided into 100 centimes, giving the following coins; the 5c, 10c, 20c and 50c coins. In addition, there are also 1, 2- and 5-franc coins.
The Bank notes are denominated as follows; 10 CHF, 20CHF, 50 CHF, 100 CHF, 200 CHF and 1,000CHF
Key Drivers to the Value of the Swiss Franc in Forex Markets
The stability of the Swiss Economy plus the sophistication if the Financial Sector makes the Swiss Franc as ‘safe-haven’ currency. As turmoil or disruption affects other leading economies investors often choose the Swiss Franc as a safe bet. As such the CHF ranks the 7th most actively traded Forex Currency, primarily against the Euro and also the US$.
For a more detailed look at What Drives Forex Markets and How to Make Profits please see our article of the same name.
