Fundamental Analysis Chapter-III

Education - Fundamental Analysis Chapter-III

Major currencies :


Currencies are known to societies for ages. Back in the old days, bartering was the first way of payment. Later on, when adventurers discovered new lands, people started trading on a greater scale and economies developed. A more convenient way of paying was introduced – money. In the form of coins and paper bills, money is all around us and we deal with it on an every day basis. Recently, with technological advancements electronic payment was introduced making it easy to pay for products and services. In the world of debit and credit cards, online payments or wire transfers, we physically see our money very seldom. We do not carry cash with us any more! But still we make payments in certain currencies.

Almost every country in the world has its own currency. Of course, there are exceptions like the Euro zone. On the Forex markets we can trade almost any currency available. Some of them are more popular since they are used in the major economies and for interbank transactions. The most important currencies in the world are: the U.S Dollar, the Euro, the Japanese Yen, the British Pound, and the Swiss Franc. These are the most liquid currencies (can be converted or exchanged at almost at any time at the current spot rate) and that is why they are called the “majors”. In the section below, I want to describe each of the listed currencies.

The U.S Dollar
The United States Dollar is the most important currency in the world. Most of the currencies are quoted against the dollar. During times of economic and political disturbances, the U.S Dollar is the safe-heaven currency. It proved its strength especially during the Asian crisis in 1997 and 1998.
The importance of the U.S Dollar began after World War II when in the Bretton Woods Accord* other currencies were virtually pegged to it.

As an interesting fact, the term “Benjamin” refers to the 100 dollar bill with Benjamin Franklin on the bill. Also widely heard “greenback” refers to the color of the American currency paper bills.
The importance of the American currency declined a little when the Euro was introduced in 1999 for the Euro zone.

Abbreviation: USD

The Euro
The Euro was introduced on January 1^st 1999 and was designed to become the most important currency in the world. Currently, 13 European nations use the common currency (there were 11 participating countries when the Euro was introduced. The Euro has strong international presence backed by strong economies of the member countries of the European Monetary Fund. Currently, the Euro strengthened to its all-time high against the U.S Dollar. As an interesting fact, these are the starting conversion rates from start date of the Euro on January 4^th 1999:
1 EUR = 40.3399 BEF                              1 EUR = 1.95583 DEM
1 EUR = 166.386 ESP                              1 EUR = 6.55957 FRF
1 EUR = 0.787564 IEP                             1 EUR = 1936.27 ITL
1 EUR = 40.3399 LUF                              1 EUR = 2.20371 NLG
1 EUR = 13.7603 ATS                              1 EUR = 200.482 PTE
1 EUR = 5.94573

Abbreviation: EUR

The Japanese Yen

The Japanese Yen is the third most traded currency in the world, though some would argue that it is the most traded. What makes the Yen so attractive to investors is the interest rates level in Japan, which currently remains at 0.5%. Such low cost of money allows traders and investors to take advantage of the so called carry trades. In a simple way, carry trading involves borrowing in a currency on low interest rate (like the Yen) and investing in a higher-yielding financial instrument (ex. the U.S Dollar). The yen is very liquid and traded almost around the clock. It is very sensitive to the Japanese stock exchange, the Nikkei.

Abbreviation: JPY

The British Pound

The currency of reference before World War II. It is traded mostly against the U.S Dollar and the Euro. Its nickname, “cable” comes from the telex machine, which was used to trade it at the beginning of the 19^th century. Information about the British Pound’s quotations was sent from London to New York through a telex machine with some delay.
In 1990 the British Pound joined the Exchange Rate Mechanism (ERM) and till 1992 had to follow the Deutsche Mark’s fluctuations. Its withdrawal from the ERM had a good effect on the currency.
Before the introduction of the Euro, the cable was the currency of choice along with the American dollar. Nowadays, the British government is trying to bring UK’s interest rates to the Euro zone level to make the pound more attractive.

Abbreviation: GBP

The Swiss Franc
The Swiss Franc represents the strength and quality of the Swiss economy and finance. Even though the country’s economy is relatively small, its currency has a great impact on global markets. The Swiss Franc does belong neither to the European Monetary Fund nor to the G-7 countries. Despite that, since Switzerland has a close relationship with Germany and the Euro zone, it resembles the patterns of the Euro. The franc is considered a very stable currency but lacks the liquidity of the Euro. That is why in times of higher demand for the franc, it can be much more volatile than the Euro. In times of uncertainty (especially in the Middle East), the Swiss Franc is favored over the Euro. Interest rates being relatively low in Switzerland draw investors to take credits in francs.

Abbreviation: CHF

The presented currencies constitute the “majors”. Most transactions around the world are finalized with one of the mentioned coins. Since most currencies around the world are traded against them, fundamental analysts focus on the major economies of the world. For this reason, macroeconomic information published in the U.S, the Euro zone, Switzerland, and United Kingdom is the most anticipated data by investors from around the world.

*The Bretton Woods Accord was signed in July of 1944 by the United States, Great Britain, and France. In order to make the currency market stable, pegging of currencies was provided and the International Monetary Fund was created. In accordance to the treat, the major trading currencies were pegged to the dollar and could fluctuate only 1% on either side of the rate. When any currency exceeded that limit, the central bank from that country was obliged to intervene buy either buying or selling currency in order to bring it back into the range. At the same time the U.S Dollar was pegged to gold at $35 per troy ounce. The American dollar became the world’s reserve currency.

In 1978 the International Monetary Fund allowed currencies to free-float, meaning that the value of each currency is derived from the demand and supply factors, without any limits to stay within.