Why Foreign Currency Trading Is Popular

Date Monday, September 8th, 2008

10 Things Stock and Commodity traders need to know about trading Currencies:

1. Did you know that the Canadian dollar is highly influenced by oil? As oil goes up, it provides support for the CAD. Also, rising oil hurts Japan since they have to import over 95% of their oil no matter what the price is at the time. This is why CAD/JPY can be a great “oil trade”.

2. Did you know that the Australian dollar is highly influenced by gold? As gold rises, in provides support for the AUD.

3. Did you know that the Japanese yen is a gauge of risk? When the Dow goes down, it generally goes up. When the Dow goes up, JPY generally goes down.4. Did you know that the New Zealand dollar is influenced by agricultural prices? As agriculture prices increase, it provides support for the NZD.

5. Did you know that Japan likes to have a “cheap” currency? Since they are major exporters, they want their goods to appear very inexpensive.

6. Did you know that over a long period of time, the Canadian dollar is highly influenced by the health of the U.S. economy? This is because Canada is a major exporter of oil, lumber, etc. and as their biggest trading partner slows down, so do they.

7. Did you know that the Euro and the U.K. economies have similar economies? So that when EUR goes up, it’s likely that GBP will also. This is why in many years EUR/GBP will range trade.

8. Did you know that USD/CHF trades inversely to EUR/USD? They mirror each other. One reason is because the USD is listed on opposite sides of the pairing. The other reason is because EUR and CHF are trading partners so that when one sneezes the other catches a cold. So their economies are linked to a certain extent. All of this causes the inverse correlation between the two pairs. So if you’re buying EUR/USD and selling short USD/CHF, you’re essentially in the same trade.

9. Did you know that Australia and New Zealand have a tendency to follow one another? They both tend to have rising and falling interest rates at similar times and they are big exporters. There’s a lot of Asia that gets a lot of their non food products from Australia and their food products from New Zealand. This is why, in many years, AUD/NZD will range trade.

10. Did you know that when the Nikkei is down over night and the U.S. stock futures point to a lower opening, that there’s a good chance that EUR/JPY will head lower in the short term?

Bonus: Did you know that the Euro is also referred to as the “anti-dollar”. This is one of the first places money runs to when it doesn’t like the U.S. dollar or what’s going on in the U.S. economy.

Conclusion: So you can see that if you have a background in these other markets, namely stocks and commodities, that it can be a great benefit when you’re coming into the currency market. One of the things that is nice about the currency market is that it focuses on big macro events and doesn’t have to worry about backdated stock options or CEO greed. For the commodity trader, currencies are a financial instrument that doesn’t expire. They also have more volume than commodity contracts.

Currencies offer more tradable hours than stocks or commodities have. So for those that have a traditional job, this can be a huge benefit.

by Sean Hyman

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