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Which Forex currency you should trade?
Depending on the economic situation, investors choose where to invest their money and what currency to buy.
Not everyone knows that there are many currency pairs that can be traded. Many traders, especially beginners, only trade major Forex pairs such as EUR/USD, GBP/USD, USD/JPY. But have you ever thought of other opportunities that would allow you to make bigger money?
In this article, we will tell you about the main types of currencies. You will learn to use each currency pair in different situations to increase your income.
Safe currency (Refuge currencies)
Do you know what safe-haven is? A safe-haven is a place that is safe from loss or harm.
There are currency pairs that can protect you from financial harm. Safe-heaven or safe currency pairs are currencies that can strengthen when the market is unstable and fear in the market where investors need a safe place for their investments.
What are the currency pairs? Safe-heaven currencies exist in countries with stable political and economic situations, low inflation rates and payment of surplus balances. Over time, various currencies have played a role as a safe currency. For now the safest currencies are the US dollar, the Japanese yen, and the Swiss franc.
We provide a brief description for you.
- US Dollar
- The US dollar is the most traded currency. The US dollar has played a role as the main currency since the Bretton Woods conference in 1945. Over the last ten years, more than 60% of the country’s foreign exchange reserves are controlled by the US dollar. All things being equal, investors also see the US dollar as a safe and reliable currency. Positive news regarding the growth of the American economy and the labor market also helps maintain the exchange rate of this currency.
- Japanese Yen
- The Japanese yen is another currency that attracts many investors. The yen is interesting because it can still arise even when there is negative news from Japan. This is because Japanese investors return their money from abroad to the domestic market (a process known as repatriation). Cross-currency pairs such as AUD/JPY, NZD/JPY, CAD/JPY are often traded and negative news in commodity markets leads to a rise in the yen and, as a result, a decline in these pairs.
- Swiss Franc
- The Swiss franc is a safe currency because of Switzerland’s political neutrality and attractive banking sector. During the 2010-2012 eurozone debt crisis, demand for the franc was high.
In conclusion, we can say that reserve currency pairs are used more when the economic situation is unstable and investors want to protect their savings.
In conclusion, we can say that this reserve currency pair is used more when the economic situation is unstable and investors want to protect their savings.
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We are sure you know that commodities are the staples of trading. If you remember this definition, it will not be difficult for you to define a country with a commodity currency. Commodity currency is an economic currency with a large share in the production and export of natural resources such as oil, gas, coal, precious metals, etc. Canadian, Australian and New Zealand dollars, Russian rubles and Norwegian krone are examples.
However, most commodity currencies are regulated by the government and are not widely traded on the market. That is why only three currencies are traded on the international Forex market: CAD, AUD and NZD. All three fluctuate.
A distinctive feature of this currency is that its exchange rate is strongly influenced by market risk sentiment in general and export dynamics in particular. This currency tends to strengthen when the world economy is developing and requires a lot of resources. That’s because these countries earn higher revenues from the sale of high-value commodities. This causes them to increase interest rates. The higher the interest rate, the more attractive foreign investors are.
These investors use a carry trade strategy: they borrow money in low-return currencies and invest in high-yielding commodity currencies. A high rate of return is correlated with a high risk. Carry trades can support the rise of commodity currencies. However, if the situation reverses, and financial conditions deteriorate, it will lead to capital outflows and a fall in commodity currencies. When the global economy falters, commodity currencies fall.
Let’s examine an example of a carry trade. When Australian interest rates are higher than in Japan, investors sell the yen and buy the Australian dollar. This will push the AUD up. When market volatility increases or Australian price growth slows, investors close their trades and the AUD depreciates.
Let’s look at the three main countries with commodity currencies.
- Canada is famous for its oil and gas resources. So the Canadian dollar is highly dependent on oil and gas prices. When the price of crude oil rises, the Canadian dollar strengthens. At the same time, the Canadian economy is tied to the American economy. America is a major importer of Canadian commodities. So, a weak American economy could lead to a decline in Canadian exports and a fall in the CAD exchange rate.
- Australia exports natural resources – copper and iron ore. China is the biggest buyer of Australian commodities, so the Chinese economy has a big influence on the Australian dollar. When China’s economic numbers are positive, the AUD value will rise against the USD and vice versa.
- New Zealand
- New Zealand’s exports are based on the agricultural sector: dairy products, meat, timber and wool. Currencies are affected by milk auction figures, for example, Global Dairy Trade. In addition, the New Zealand economy is correlated with the Australian economy.
In short, when traders want to trade commodity currencies, they must follow the price trend in the commodity market.
In conclusion, we can say that Forex traders should always consider the economic situation. When the world economy is stable and growing, traders can earn high profits by trading commodity currencies namely AUD, NZD, and CAD. However, during periods of economic instability, it is better to choose safe currencies namely JPY and CHF.
There are a large number of currency pairs including commodity currencies and safe currencies. This currency pair has great profit potential.
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