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Believe or it or not, even the currency can be traded and can sometimes be a diversification for a portfolio especially if the stock market hits a snag in its trading. Despite the foreign exchange market being billed as a banker’s game, trading with currencies can be a great way of making money. So take up the initiative to learn a little bit about the forex, which will include the basics behind it. And in no time you will find out that this particular knowledge will make a significant contribution to your investments, including your portfolio. Now let’s take a look at some of the currencies that every trader and investor should know about, which includes their respective nations and the banks that operate there. 

The US Dollar
The US Dollar is one of the major trading currencies in the world and it was created by the Federal Reserve Act in 1913 and the central banking body of the US is known as the Federal Reserve System which is also called the Fed. A chairman and the board of governors head this system and most of the attention is placed upon a branch from the system known as the Federal Open Market Committee (FOMC). The FOMC’s task is to supervise the open market operation which includes interest rates and monetary policy.
As of right now, the current committee consists of 5 out of the 12 current Federal Reserve Bank presidents. While the remaining seven members comprises the Federal Reserve Board and with one member that always serve on the committee is the Federal Reserve Bank of New York. Despite that there are only 12 members who can vote, when the committee meets every six weeks non-members which include additional Fed Bank presidents are welcome to share their views and provide feedback on the current economic situation.

The US Dollar is sometimes referred to as the greenback, and it is the world’s largest economy of the home denomination which the United States. The US Dollar is just like any other currency because it is affected by economic fundamentals such as the manufacturing and employment reports, as well as the gross domestic product (GDP) among other things. The US Dollar is also influenced by other factors such as the central bank as well as any other announcements regarding the interest rate policy. It is also a benchmark that is used to trade with other major currencies in the world especially the British Pound, the euro and the Japanese yen.

The US Dollar fell in value between the years of 2003 to 2008, compared to most of the major currencies in the world. And it kept decreasing with the US Dollar reaching its lowest of low in the years of 2007-2008, that not only affected domestic investments but also on the international level as well.
One thing that investors need to know is that the impact of the rise and fall of the US Dollar is multifaceted. Other things that investors ought to understand is how the effects of the exchange rates have on the financial statements, whether this relates to where the goods are sold and produced as well as the inflation of raw materials. The combination of these factors can assist investors in determining how and where to allocate their investment funds.

- How to trade when the US Dollar is weak
The Financial Accounting Standards Board (FASB) is the governing body in the US that mandates how companies account for business operations on financial statements. The functional currency is where the FASB determines the primary currency in which each entity conducts its business. But take note that the functional currency may differ from that of the reporting currency where in such cases the translation adjustments which may result in gains or losses. These numbers are then included when calculating the net income for that particular period.
Do not fear if you do not understand what these technical lingo mean especially when you are in the falling US dollar environment. For example if you are investing in a company which has most of its business conducted in the US and is headquartered there, this would mean that the reporting and functional currency would be in the US Dollar. However, if that particular company has subsidiaries in Europe then the euro would be its functional currency. The dollar/euro exchange rate will then be used when the company translates the subsidiary’s results into the reporting currency which in this particular case would be the US Dollar. So in a falling dollar situation, when you use the euro to buy, it will cost $1.54 compare to the previous rate of $1.35. This means that the company will benefit from the translation gain with a high net income when you translate the subsidiary’s results in the falling US Dollar scenario.
To take advantage of the currency movement, one has to understand the accounting treatment for foreign subsidiaries. After that you would need to know where the goods are made and sold. The low-cost provider countries are acquiring the opportunity of those manufacturing dollars as the US is moving to become a service economy as compared to the previous manufacturing economy. The US also sensing this opening has started outsourcing much of their manufacturing and even some of their service jobs to low-cost provider countries, in order to exploit the cheaper costs as well as to improve their margins. So when the US Dollar is strong, the low-cost provider countries that produce cheap goods will then be sold of by the companies at a higher price to consumers abroad in order to make a sufficient margin.
So situation would work well when the US Dollar is strong, but when the US Dollar is weak then, the better solution would be to keep the costs in US Dollar while receiving revenues in other stronger currencies. This would mean becoming an exporter, for example between the years of 2005 and 2008, most of the US companies took the opportunity of the depreciating of the US Dollar by exporting as it showed signs of growth. This was also due to the of the shrinking US current account deficit with an 8 year low of gross domestic product (GDP) of 2.4% during 2008 which excluded oil.

The European Euro
The European Central Bank (ECB) is headquartered in Frankfurt Germany, and is the central bank is the 15 member countries of the Eurozone. The ECB works in a similar way of the US’ FOMC, where the ECB is the body that is mainly responsible for making monetary policy decisions. The executive council is headed by a president and consists of five members while the remaining policy heads are chosen with consideration that the four remaining largest economy in the system are reserved which includes France, Germany, Spain and Italy. The system is arranged in such a manner to ensure that the largest economies are always represented if there was a change in the administration. The ECB meets up approximately 10 times in a year.
The ECB does not only have jurisdiction over monetary policy but they also have the right to issue banknotes as they see fit. Again, if compared to the Federal Reserve it is almost similar as the policy makers can interject when the bank or system faces failure. However, one of the key aspects where the ECB differs from the Fed is that the ECB works towards a prime principle of price stability, only focusing on general economic policies as their secondary commitments instead of maintaining stability of long term interest rates and maximizing employment. This will result in policymakers focusing on consumer inflation when making decisions on key interest rates.
Despite having a complex monetary body, the currency is the opposite of that. The Euro if compared to the Australian Dollar and British pound tends to be a slower currency against the US Dollar. The base currency can trade between 30-40 pips on an average day and it can increase to an average about 60 pips per day. Time is also another factor that needs to be taken into consideration. It usually occurs from 2am through 11am EST where the trading in the euro based pairs can be seen during the US and London sessions.

The Japanese Yen
The type of currency was established by the Bank of Japan in the year of 1882 and serves as the central bank for the world’s second largest economy. The task of the Bank of Japan is to govern monetary policy, money market operations, data/economic analysis as well as currency issuance. What the main Monetary Policy Board does is to; work towards economic stability by continuously exchanging views with the current administration. They are also working hard to achieve their own transparency and independence. The governor for this particular body leads a team of nine policy makers, with two appointed deputy governors who meet to discuss issues 12-14 times per year.
The Japanese Yen (JPY) is a currency that trades with low interest rates and is pitted against higher yielding currencies such as the Australian Dollar, New Zealand Dollar, and the British Pound. The currency is also usually traded under a carry trade component identity. This would result in the underlying becoming very unpredictable and this causes traders to take a technical perspective on a long term basis. The pips can reach as high as 150 but the average daily pips range from 30-40. In order for you to gain an advantage using this currency, the best time to trade is to focus on the crossover of the US and London hours which is from 6am – 11am EST.

The British Pound
The Bank of England has the same task which is equivalent to the Federal Reserve System in the US, and is also the main governing body in the United Kingdom. As such it also has the responsibility for establishing a committee that is headed by the governor of the bank. It is made up of nine members that consist of four external participants that are appointed by the Chancellor of Exchequer, the director of market operations, a chief economist, two deputy governors and a committee chief economist.

The committee members also known as the Monetary Policy Committee (MPC) meet every month for that particular year to decide on the broader monetary policy and the interest rates. They also look into the total price stability of the countries economy and they also have a benchmark for consumer price inflation which is set at 2%. The governor has the responsibility to notify the Chancellor of Exchequer through a letter if that ser benchmark is ever compromised. For example this happened in the year 2007 when the UK CPI rose sharply to 3.1%. However, when the letter is released to the public, it tends to not be a good sign for the market as this increases the chance of the monetary policy becoming contraction.

If compared to the euro, the British Pound which is also sometimes referred to as the cable or pound sterling tends to trade a wider range through the day. The swings can encompass between 100-150 pips but it would not be unusual to see the pound trade as 20 pips. Major volatile movement is usually apparent for swings in notable cross currencies, such as the ones that traders focus upon which includes the British Pound/Japanese Yen and the Pound/Swiss Franc. Minimal movement is shown through the Asian hours which is from 5pm – 1 am EST but it is more volatile through both the US and London hours.

The Swiss Franc
The Swiss National Bank differs from all other major central banks as it is viewed as a governing body not just for private ownership but for public ownership as well. This stems from the belief that the Swiss National Bank is under special regulation while it technically exists as a corporation. This particular perception of the Swiss National Bank has resulted in almost half of the governing body being owned by the sovereign states of Switzerland. The Swiss National Bank has a governing board that has policies that emphasizes on financial ad economic stability. Since the governing body is smaller compare to others, there are three major bank heads that meet up on a quarterly basis to decide on monetary policies. This is also where the board creates the band ranging between the 25 basis point in which the interest rates will exist in.
The Swiss Franc (CHF) is similar to the euro as it can hardly make any significant movement in any of the individual sessions. Because of this, you have to look for this particular currency in the daily average range of 35 pips. The high frequency volume for this currency is usually pitted against the London session which is from 2am – 8am EST.

The Canadian Dollar
It was established by the Bank of Canada Act in 1934 and the Bank of Canada serves as the central bank. Their main duty is to focus on the goals of lowering as well as stabilizing inflation, maintain financial security, and create a secure and safe currency as well as the efficient management of public dept and government funds. As with the Swiss National Bank, Canada’s central bank is also sometimes treated as a corporation as the Ministry of Finance hold share directly. Despite having close relationship with the government, the central bank works hard to promote price stability at an arm’s length from the current administration while taking the government’s concern into consideration. The inflationary benchmark is set at 2-3% and the Bank of Canada is not as accommodative and remains a shade more hawkish when it comes to any deviation in the prices. The Canadian Dollar keeps in touch with most other major currencies and it tends to trade in daily ranges of 30-40 pips almost every day. What is so unique about the Canadian Dollar is that the relationship it has with crude oil, this is because the country is still one of the major exporters of this commodity. Because of this unique relationship most investors and plenty of traders use this currency as either for pure speculation by tracing signals from the oil market or a hedge against current commodity positions.

The Australian/New Zealand Dollar
The Reserve Bank of Australia offers one of the higher interest rates in the major global market. It also has always upheld price stability and economic strength, which is promoted by the Reserve Bank of Australia as its cornerstones for its long term plan. It is headed by the governor and the bank’s board consists of six members at large that will also include a secretary of the Treasury and the deputy governor. All the members of the board will meet up 9 times throughout the year and work together to target the inflation rate between 2-3%. The Reserve Bank of New Zealand also has similar responsibilities which include the promotion of inflation targeting as well as maintaining a foundation for prices. As both the Australian and New Zealand Dollars offers the highest yields compared to that of the seven major currencies available on most platforms, they have become the focus of carry traders. If a de-leveraging effect takes place then volatility can be experienced in these pairs, however if this situation does not occur then the currencies tend to trade between an average of 30-40 pips almost on a daily basis. Another unique aspect of both of these currencies is that they maintain relationships with that of commodities especially gold and silver.

The South African Rand
The South African Reserve Bank was previously modeled after the United Kingdom’s Bank of England. And it stands as the monetary authority when it comes to South Africa with it having the same major responsibilities as those of other central banks. The bank also has other responsibilities such as a clearing bank, a creditor in certain situations, a major custodian of gold and also in charge of the maintenance and achievement of price stability which includes the intervention of the foreign exchange market when situation arises. What is interesting about the South African Bank is that it remains a wholly owned private entity and consists of more than 600 shareholders that are regulated as they own less than 1% of the total amount of outstanding shares. The objective is to ensure that the interest of the economy precedes those of any private individual. The board meets six times a year and to maintain the policies, the governor with its 14 member board is in charge of the bank’s activities and progresses towards their monetary goals. The South African currency is seen a relatively volatile and the average daily range can be as high as 1000 pips. Despite such a high daily range when translated into dollar pips, it can become a great pair to trade with the US Dollars especially when the carry potential is taken into consideration as the movements are the same as the British pound in an average day. The South African economy is seen as the world leader in both the exports of gold and platinum, traders the currency into consideration when compared to these metals which is the same as the correlation between that of the Canadian Dollar and crude oil. So when the economic data is scant, commodities markets should be considered when creating economic opportunities.