that each individual currency tracks, as each not only is affected by the U.S.
dollar but also is manipulated by its own country’s economic and political
influences. From a historic perspective, let’s examine the top-five major
currencies and what influences their values:
1. The Euro. The euro was first introduced to world financial markets
as a currency in 1999 and was finally launched with physical coins and
banknotes in 2002. The European Union is composed of these member
countries: Austria, Belgium, Greece, Germany, France, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, and Spain. The largest members
are considered socialist countries; and as a result, these countries
tend to run the largest governmental budget deficits. The European
Central Bank (ECB) dictates monetary policy and puts more emphasis
on inflation concerns than it does on economic contraction. We have
seen in the past where the ECB would rather maintain steady interest
rates in periods of slower economic growth than lower rates and risk
igniting inflationary pressure. As a result, the ECB is less likely to frequently
adjust rates.
2. The Japanese Yen. The Japanese economy depends on sales of export.
For the most part, Japan is a net importer of raw material goods,
especially crude oil. Japan’s economic machine hinges on foreign demand
for their manufactured goods. Their main customers are the U.S.
consumer and Europe. One of the biggest concerns that faced the Bank
of Japan (BOJ) in the 1990s was deflationary pressures. This compelled
the BOJ to keep what was known as a zero-interest policy to help
reignite its economy. In turn, it also artificially kept the value of the yen
low as many savvy investment funds made billions of dollars in what is
known as a carry trade—one entity would borrow cheap money at
nearly zero interest, export those funds to another country, and park
them in a higher-interest-bearing account. This transaction prompted
selling of yen to buy the currency in which those funds were to be invested
or parked. U.S. Treasury notes and bonds as well as German
bunds were the target of these transactions. As a result, the yen would
trade lower against the U.S. dollar and the euro. Therefore, trading the
yen/euro cross pair is a viable market to trade. One more consideration
when focusing on factors that can influence the yen’s value is that
China is one of Japan’s competitors. Since China also artificially floats
its currency, the yuan, against the U.S. dollar, China’s monetary policy
also weakens or can put downward pressure on the yen’s value.
3. The British Pound. The Bank of England (BOE) is in charge of dictating
monetary policy in the Unted Kingdom. One of the main influences
on Britain’s economy is oil production in the North Sea. Money
may make the world go round, but energy keeps it running. With that
said, you will see in history that as oil prices rise, the British pound
also tends to follow suit. However, oil supplies are dwindling in
the North Sea, and Britain is using more and more natural gas. As of
August 2006, Britain was Europe’s biggest consumer of natural
gas, and it is continuously increasing imports of the fuel to make up
for declines in crude oil production. As a result, natural gas prices in
Britain have risen an average of 60 percent from 2005 through 2006. It
is now reliant on natural gas and susceptible to economic risk exposure
if there are outrageous price spikes in the cost of that product. As
of 2004, Britain became a net importer of natural gas. If natural gas
prices spiral out of control, this factor can influence consumer spending
or can create a surge in inflationary pressure; and that would justify
action by the Bank of England to change monetary policy. This
scenario could influence the value of the British pound. The pound is
also sensitive to economic developments of its European neighbors.
Therefore, trading the cross of the euro against the pound is a very liquid
trading relationship.
4. The Canadian Dollar. The Canadian dollar is often referred to as the
“loonie.” The French equivalent of loonie is huard, which is French for
loon, the bird that appears on the face of the Canadian one dollar coin.
The Bank of Canada (BOC) sets monetary policy as it is the central
bank for that country. Back in November 2000, the BOC adopted the
system of eight meetings each year, in which it announces whether it
will change its interest rate policy, just as in the United States. Canada
is rich in natural resources, especially crude oil. The primary source of
Canada’s growing crude oil supplies are vast oil sands reserves. Oil
sands production, which exceeded the 1 million barrels per day (b/d)
plateau late in 2003, is forecast to more than double by 2015 to almost
2.6 million barrels per day. With 175 billion barrels of reserves, it is the
second-largest petroleum deposit in the world. Since the United States
is Canada’s biggest client, as oil prices rise, the value of the Canadian
dollar will be supported in value.
5. The Swiss Franc. The Swissy, as it is called, is considered the safehaven
currency, as it is backed by gold. The Swiss National Bank
makes monetary policy decisions based on events that impact the value
of gold as they influence the value of the currency. Factors that influence
the Swiss franc are inflation, excessive economic growth or periods
of economic contraction, and periods of political instability. The
Swiss franc tracks the value of the euro; but during periods of European
upheaval, as occurred in 2004 when there existed dissention
among members of the European Union, the Swiss franc will outperform
the euro.
Source: Forex Conquered: High Probability Systems and Strategies for Active Traders
