Forex - Know Your Currencies And Their Characteristics

Unlike stocks where a stock may have an uptrend if the company keeps coming out with good results or vice versa, in foreign exchange market the value of a currency depends not only the health of the economy of the nation in concern but also on the other economies.

Every currency has its own characteristics inherited from the nature of the economy of the concerned geography. Depending on these characteristics various currencies may behave in different ways in different market situation. An understanding of these characteristics is very important while we trading in Forex market.

Commodity currencies:

Australian Dollar, Canadian dollar and the New Zealand Dollar are known as commodity currencies. These countries are export oriented countries. These nations are commodity exports with Australia in the leading position because of the virtue of having largest net commodity exports as a percentage of its total gross domestic product. Out of these three countries New Zealand takes the second place with Canada following. As a logic commodity exporters would have large natural resources and less population to use it and hence the surplus.

Now the health of their economy depends also on the health of the importing economies and hence a major bad economic release of some of those importing countries may cause the currencies of these to take a nose dive. Hence what is required is an analysis of the exports.

Australia and Australian Dollar:

Main exports of Australia are coal, iron ore, gold, and other natural resources including crude oil. Now coal, iron ore and such natural resources are in high demands by the fast developing nations. Any good news from China or India may make the Australian Dollar (AUD) to look up and any major bad news from those countries may make AUD to jump down.

Canada and Canadian Dollar:
Canada's main exports include petroleum, crude oil, natural gas, lumber, agricultural products and also many mineral resources, such as zinc and uranium.

New Zealand and NZD:

New Zealand exports Agricultural products, such dairy products and wool and also fishing and lumber

Considering the example given above about fast developing nations like China and India, Australian Dollar would have great impact from the economic situations in these kinds of nations.

Commodity currencies also go up when the risk appetite is high. Risk appetite goes up when the confidence in global economy is good and people tend to invest in these high yielding currencies or assets.

Safe Haven Currencies:

U.S. Dollar and Swiss Franc are known as safe haven currencies. Whenever there the risk appetite goes down the big fund managers and investors try to move their funds in these currencies as these are considered to be safer. US Dollar leads the way when it comes to the Forex exchange reserves maintained by main economies. In 2010 the total US Dollar reserves maintained by various central banks were over 61%. Compare this with the second position held by Euro at little over 26%. A major devaluation in US Dollar goes against the interest of all these economies which are maintaining huge reserves in US Dollar.

Swiss Franc falls into Safe Haven currency because of close to 0% inflation and also because for many years Swiss Franc used to be backed by Gold. Though now the requirement of backing it by at least 40% gold is not there but still the percentage of gold reserves is over 27%.

The economies change and evolve. Considering the fact that total US Dollar reserves globally which were continuously increasing from 1995 to 1999 and increased during this period from 59.0% to 70.9% stood at 61.4% in 2010 and the fact that the Euro reserves which were at 17.9% in 1999 reached 26.3% of total reserves in 2010, it may be safe to say that Euro may emerge as a Safe Haven in the future. Euro-Dollar race may be an interesting one to be watched.

Low Yielding currencies:

With the economic down trend the interest rates have gone down world over including British Pound, US Dollar and others but Japanese Yen historically has been having very low interest rates. This is because of the low inflation rate which has also seen times of going into negative i.e. deflation. The other currency which falls in this category is Swiss Franc or CHF which is also considered as a safe haven currency along with US Dollar.

Low yielding currencies tend to go up when there is a global turmoil and the confidence in the global economic situation goes down. The reason is not that they are considered safer but because of the unwinding of carry trades. During the times when risk appetite is high, people invest in the currencies and assets which have higher yield e.g. interest rates by selling the low-yielding currencies/assets. But when the confidence in the global economies is down and risk appetite goes down, people turn back towards the low yielding currencies.