Albert Einstein loved the forex market. This is a market where you are trading on relativity!
When you “buy” a currency in foreign currency you are not really “buying” anything. All you have to do is open a contract with one currency for another currency.
Foreign exchange contracts are quoted subject to the value of one currency (“quote”) with another currency (“base”).
For example, the most actively traded currency pair is the euro against the US dollar. This pair is listed as EUR / USD. In this case, the euro is the quote currency. US dollar base. So, you can see EUR / USD quoted at 1.5929 Euro Trading at 1.5929 USD or buy a Euro at 1.5929 USD.
Most traders look at the economic fundamentals of the country under each currency. They then seek to strengthen or weaken one economy versus another. When they see that the economy of one country is getting stronger and the economy of another is getting weaker, they see that trade is developing in favor of the currency of the strong country.
Here is an example. Australia’s economy has been very strong, recently because its economy is heavily linked to commodity prices – the largest exporter of gold. The demand for gold by the Chinese industry has increased and continues to do so. India is also demanding more of the precious metal as their growing middle class gold jewelery can always be desired by Indian women. This has been a boon for the Australian dollar for many reasons, but one is that the Royal Bank of Australia – the equivalent of the Federal Reserve’s Aussie – has had to raise interest rates to protect the Australian economy from overheating and to keep inflation low.
At the same time Australia has increased their rates overnight, our Federal Reserve has reduced us. Therefore, you would expect to see a relatively strong Australian dollar against the US dollar.
So, trade this. If you open an agreement in AUD / USD, you will do so on behalf of AUD. Another advantage of taking this position and another reason to expect increasing strength for it is that you are paid interest every day to hold the position. Yes, the difference in interest between the two currencies is credited to your account every day that the market is open!
AUD / USD’s 5-year chart shows the trend at a glance.
This is the theory of relativity in the workplace!