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Foreign Exchange Basics - Currency Pair Descriptions |
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Currency Pair DescriptionsIn the forex market, currency trading is always done in currency pairs, such as EUR/USD or USD/JPY. Accordingly, all trades result in the simultaneous buying of one currency and the selling of another. The base currency is the "basis" for the buy or the sell. It is useful to consider the currency pair as an instrument, which can be bought or sold. The following are examples of situations that might lead you to choose a particular currency pair to trade: EUR/USD• Dollar weakness drives EUR/USD higher If, for example, you think the US economy will continue to worsen and that will hurt the USD, you click on BUY, which means that you are buying Euros and expecting them to go up against the USD. If, for example, you think that there will be increased foreign demand for US assets such as equities and treasuries and that will benefit the USD, you click on SELL, which means that you are buying U.S. Dollars and expecting them to climb in value against the Euro. USD/JPY• Japanese government intervention to weaken their currency sends USD/JPY higher If, for example, you think that the Japanese government will continue to weaken the Yen in order to help its export industry, you would click on BUY, expecting the U.S. Dollar to increase in value against the Yen. If you think that Japanese investors are pulling money out of US financial markets and repatriating funds back into the Japanese asset markets, such as the Nikkei, you would click on SELL. This means that you expect the Yen to strengthen against the U.S. Dollar as Japanese investors sell their assets and convert their dollars back into Yen. GBP/USD• High yield and attractive growth in the UK drives GBP/USD higher If, for example, you think the British economy will continue to benefit from its high yield and attractive growth, thus buoying the Pound, you would click BUY, which means that you expect the British Pound to strengthen against the U.S. Dollar. If you believe the British are about to commit themselves to adopting the Euro, you would click SELL, expecting the Pound to weaken against the dollar as the British devalue their currency in anticipation of merging with the Euro. USD/CHF• Global stability and global recovery will send USD/CHF higher If, for example, you think that the market is headed towards a period of global stability and economic recovery, meaning that investors no longer need to park their money in the safe haven currency, or Swiss Franc, you would click BUY, expecting the U.S. Dollar to strengthen against the Swiss Franc. If you believe that due to instability in the Middle East and in US financial markets, the dollar will continue to weaken, you would click SELL, expecting the Swiss Franc to strengthen against the dollar. EUR/CHF• Swiss government uses verbal intervention to weaken the Franc, sending EUR/CHF higher If, for example, you think the Swiss government wishes to devalue the currency to help exports in Europe, you would click BUY, expecting the Euro to increase in value against the Swiss Franc. If inflation started taking off in Germany and France, you would click SELL, expecting the Swiss Franc to increase in value against a devalued Euro. AUD/USD• Rising commodity prices sends AUD/USD higher If, for example, you think that commodity prices are going to rise dramatically, thus benefiting the AUD, you would click BUY, expecting the aussie to strengthen against the U.S. Dollar due to Australia's status as one of the world's leading commodity exporters. If you believe that Australia will face another drought, hurting the domestic economy, you would click SELL, expecting the U.S. Dollar to strengthen against the AUD. USD/CAD• Canadian economic underperformance against US sends USD/CAD higher If, for example, you think that the US economy is going to rebound while the Canadian economy goes into recession, you would click BUY, expecting the U.S. Dollar to strengthen against the Canadian Dollar. If you believe that the higher yields and rebounding labor market in Canada warrants a higher valuation for the Canadian Dollar against the U.S. Dollar, you would click SELL, expecting the CAD to rise against the U.S. Dollar. NZD/USD• Increased tourism and migration into New Zealand drives the NZD/USD higher If, for example, you think the success of Lord of the Rings will cause tourists to flock to New Zealand and pump money into the local economy, you would click BUY, expecting the NZD to strengthen in value against the U.S. Dollar. The New Zealand Dollar has a strong positive correlation with the Australian Dollar, so if you expect falling commodity prices to drive the AUD lower, you would click SELL, expecting the NZD to drop in value against the U.S. Dollar. EUR/GBP• Speculation about UK adopting the Euro will send the EUR/GBP higher If, for example, you believe the British are about to commit themselves to adopting the Euro, you would click BUY, expecting the Pound to weaken against the Euro as the British devalue their currency in anticipation of the merger. If you believe that Great Britain's economy will grow at a faster rate than Europe's, you would click SELL, expecting the British Pound to rise in value against the Euro. EUR/JPY• Fears of Japanese banking crisis will send EUR/JPY higher If, for example, you believe that the Japanese banking crisis will worsen, you would click BUY expecting the Euro to rise against the Yen. If for example you believe that Europe is going into recession, thus weakening the Euro, you would click SELL, expecting the Euro to drop in value against the Yen. GBP/JPY• Interest rate hikes by the Bank of England will send GBP/JPY higher If, for example, you believe that the BOE is going to raise interest rates, you would click BUY, expecting the British Pound to increase in value against the Yen as Japanese investors look abroad for higher returns. If you think the Nikkei index will rise at a higher rate than the FTSE, thus buoying the Yen, you would click on SELL, expecting the Yen to increase against the British Pound. CHF/JPY• Middle East conflict and volatility in oil prices will drive CHF/JPY higher If, for example, you believe conflict in the Middle East may cause a spike in oil prices, you would click BUY, expecting the CHF to increase against the Yen due to Japan's reliance on imported oil and the CHF's safe-haven status. If you believe there will be more stability in the region, you would click SELL, expecting the Yen to rise against the CHF. GBP/CHF• Interest rate hikes by the Bank of England will send GBP/CHF higher If, for example, you believe that the BOE is going to raise interest rates, you would click BUY, expecting the British Pound to increase in value against the CHF due to interest rate increase. If you believe the British are about to commit themselves to adopting the Euro, you would click SELL, expecting the Pound to weaken against the CHF as the British devalue their currency in anticipation of merging with the Euro. EUR/AUD• Recessionary conditions in Australia would send EUR/AUD higher If, for example, you believe that Australia is heading into recession, you would click BUY, expecting the Euro to strengthen against the AUD. If you think that commodity prices are going to rise dramatically, you would click SELL, expecting the aussie to strengthen against the Euro due to Australia's status as one of the world's leading exporters of commodities. EUR/CAD• German economic rebound and Canadian weakness will send EUR/CAD higher If, for example, you think that the German economy is going to rebound while the Canadian economy goes into recession, you would click BUY, expecting the Euro to strengthen against the Canadian Dollar. If you believe the German economy will go into recession and drag the Euro down with it, you would click SELL, expecting the Canadian Dollar to rise against the Euro. AUD/CAD• Rate hikes by the Reserve Bank of Australia will drive AUD/CAD higher If, for example, you think that the Reserve Bank of Australia will continue to raise interest rates while the Bank of Canada leaves rates unchanged, you would click BUY, expecting the AUD to strengthen against the Canadian Dollar. If you believe that a drought will once again plague the Australian economy, you would click SELL, expecting the Canadian Dollar to rise against the AUD. AUD/JPY• Japanese investment in Australia will drive AUD/JPY higher If, for example, you think that there will be a renewed resurgence of funds sent to Australia by Japanese investors, you would click BUY, expecting the AUD to strengthen against the Yen. If you believe that falling commodity prices will hurt the Australian economy, you would click SELL, expecting the Yen to rise against the AUD. NZD/JPY• External shocks to Asian tourism such as SARS and North Korea risks will send NZD/JPY higher If, for example, you think that SARS and the situation in North Korea will cause Asian tourism and exports to fall, you would click BUY, expecting the Yen to decrease in value over the NZD. If you believe that there will be a sharp decline in immigration into New Zealand or an exiting of current immigrants, you would click SELL, expecting the NZD to weaken against the Yen. CAD/JPY• Pessimism towards the Japanese economy will drive CAD/JPY higher If, for example, you believe that the weakened U.S. Dollar will cause Canadian exports to suffer, you would click SELL, expecting the Yen to increase in value over the CAD. If you think the Japanese economy will remain weak due to lack of economic structural reform, you would click BUY, expecting the CAD to rise against the Yen. |
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