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Currency Pairs Explained
Written by: PaxForex analytics dept - Thursday, 12 March 2015 0 comments
The USDJPY is trading well above 120.000 as this currency pair rallied strongly, but what does a rally actually mean? A currency pair is made up, as the name suggests, from two different currencies which are paired against each other. In the case of the USDJPY it is the US Dollar against the Japanese Yen. The first currency is referred to as the base currency so in our example the US Dollar is the base currency. The second currency is called the quote currency and in this case the Japanese Yen is the quote currency.
What does the USDJPY at 120.000 represent? Since the US Dollar is the base currency and the Japanese Yen is the quote currency this means that for $1.00 you will get ¥120.000. This is very straight forward and should be easy to understand as it applies to all currency pairs. It is important to remember that when you trade currencies the margin required is calculated in the currency of the base currency so in our example it will be US Dollars. In case you have an account in Euros for example the entire trade will then be converted into Euros.
When trading currency pairs you are putting one currency and therefore one economy against another currency and its economy. This is one reason why forex traders, even those who trade based ontechnical analysis, need to pay attention to economic
reports as they will impact currency pairs. So conduct your technical analysis, but be aware of economic releases; in out example you would want to take a look at the economic reports released out of the US and out of Japan in order to get more information on your planned trade.
This week’s economic reports out of Japan support a weaker Japanese Yen which means that the USDJPY should rally as the Japanese Yen is the quote currency. A weaker Yen means that with each US Dollar you can get more Japanese Yen. The GDP for the fourth-quarter, the quarter where Japan officially came out of its recession, were revised lower and instead of expanding at a rate of 2.2% annualized the Japanese economy expanded by only 1.5%. The worst part of the GDP report was the contraction of 0.1% in business spending and therefore the Japanese Yen weakened.
Data out of the US so far this week was lackluster, but the US Dollar rode the optimism of an interest rate increase by the US Fed after Friday’s NFP report showed an economy which added 295,000 jobs. Since no other reports were released so far which would jeopardize Friday’s optimism the USDJPY remained near its elevated levels, but was unable to move past them. From a technical perspective the USDJPY is ripe for a pull-back and as soon as a fundamental report suggests a weaker US Dollar or a stronger Japanese Yen this currency pair will reverse some of its gains. This cycle will repeat itself over and over again.