In last week's column I only managed to touch the surface on what the forex market is and who participates in it. Forex trading can indeed be difficult, it can be risky and there is a lot to learn for those new to forex. It can also be difficult to summarise a topic (any topic!) in less than 1000 words so please bear with me for a few weeks while we delve deeper into what the forex market is and how traders and speculators go about trading it.
The world's major currencies
It is important to establish upfront what the major currencies of the world are and why. Firstly the US Dollar is considered the world's benchmark currency. This means that not only it is the most highly transacted, but it is also the currency that other major currencies are most commonly compared against to establish their value. Each major currency is then paired with the USD to give us what is known as the major pairs. The commonly accepted majors are the EURUSD (Euro), GBPUSD (British Pound aka Sterling), USDJPY (Japanese yen), USDCHF (Swiss Franc), USDCAD (Canadian dollar aka the Loonie) and AUDUSD (Australian Dollar aka the Aussie). Depending on who is putting the list together, our little old pair of NZDUSD (the Kiwi) is sometimes included in the mix and since I am a Kiwi, let's be cheeky and throw it in there too.
You might be wondering why these currencies are considered the majors when economies such as Brazil, China and Pakistan are clearly bigger than many in the majors list. The reason is that the forex majors are not determined by the biggest economies but instead they are the most liquid and traded currencies. Together these major pairs represent the large majority of currency trading activity.
Some other countries do not have floating currency prices meaning they might be pegged or fixed to something else such as USD or gold. Others have too many restrictions over the movement of their currency to be included in the mix. Hence the majors are those we see listed above and they have in common stable governments, freely floated currencies, sensible interest rates, no currency restrictions, etc.