FX Market Secrets
Which currencies are traded in the forex market?
Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the majority trade the 7 most liquid currency pairs in the world, which 4 are the “majors”:
• EUR/USD (euro/dollar)
• USD/JPY (dollar/Japanese yen)
• GBP/USD (British pound/dollar)
• USD/CHF (dollar/Swiss franc)
and the three commodity pairs:
• AUD/USD (Australian dollar/dollar)
• USD/CAD (dollar/Canadian dollar)
• NZD/USD (New Zealand dollar/dollar)
Forex Market Terms
Every industry has its own terms, and the currency market is no different.
Here are some terms to know that will make you sound like a seasoned currency trader:
• Cable, sterling, pound – alternative names for the GBP
• Greenback, buck – nicknames for the U.S. dollar
• Swissie – nickname for the Swiss franc
• Aussie – nickname for the Australian dollar
• Kiwi – nickname for the New Zealand dollar
• Loonie, the little dollar – nicknames for the Canadian dollar
• Figure – FX term connoting a round number like 1.2000
• Yard – a billion units, as in “I sold a couple of yards of sterling.”
These currency pairs, along with their various combinations (such as EUR/JPY, GBP/JPY and EUR/GBP), account for more than 95% of all speculative trading in FX. Given the small number of trading instruments – only 18 pairs and crosses are actively traded – the FX market is far more concentrated than the stock market.
What is a currency carry trade?
The carry trade rests on the fact that every currency in the world has an interest rate attached to it. Carry is the most popular trade in the currency market, practiced by the largest hedge funds and the smallest retail investors.
These short-term interest rates are set by the central banks of these countries: the Federal Reserve in the U.S., the Bank of Japan in Japan and the Bank of England in the U.K.