• Published On: June 20, 2021
  • Published By: Alan Safahi
  • Category:

Aussie (aka the Little Battler): The Australian dollar. The Little Battler  moniker is derived from a British term describing a striving working-class person  from Australia or New Zealand, an underdog.

Barney & Betty: Barney is USD/RUB and Betty is EUR/RUB. Named for Fred  and Wilma Flintstone’s next door neighbors and best friends, Barney and Betty  Rubble. (the modern Stone Age families)  

Base currency / Counter (quote) currency: In a currency pair, the BASE  currency is the currency you wish to sell and which comes first in the pair.  The COUNTER or QUOTE currency is the one you wish to buy. So in the  AUD/USD pair, the trader is exchanging Aussie for Greenbacks, and the rate  represents how many Aussie will buy one US dollar.  

Basis point: one one-hundredth of one percent, usually used in reference to the  spread between interest rates.  

Bid / Ask: The spread between the buying (the bid) and the selling (the ask)  of an equity or other commodity. 

Big Mac Index: Invented by The Economist in 1986, this represents the  relative purchasing power of a given currency by comparing the price of a  widely-available item in one country to another. Contrast the bicycle index in the  Netherlands. 

Bretton Woods Agreement: Where USD hegemony began. In 1944, a  conference of more than 700 delegates from 44 allied nations convened in New  Hampshire to establish a new global monetary policy to increase the stability of  the global economy. The agreement established the U.S. dollar as the world’s  reserve currency, rather than gold, against which other currency values would  be pegged. Though the Bretton Woods agreement collapsed in 1973, allowing  major currencies to float, many commodities, including oil, are denominated in  USD. 

Brexit: The separation of the United Kingdom from the European Union after  47 years. The UK joined the European union in 1973 and in 2016 voted to  leave the bloc. The “Brexit” negotiations concluded on 24 December 2020.

Bull / Bear: describes the direction of a market: a bull market is trending  upward while a bear market is going down. According to Investopedia, the  terms derive from the way each animal attacks: The bull raises its horns to toss  its opponent upward, while the bear swipes its fearsome claws down to slash at  its opponent.  

Cable: the USD/GBP pair—so named because it was exchanged via a  transatlantic cable.  

Central Banks: the governmental banking entities that set monetary policy for  each country, adjusting interest rates and controlling money supply to keep the  economy running smoothly.  

CNY vs CNH: China also has two currencies: the onshore currency, CNY, is  traded only in mainland China and there are restrictions on how much money can be taken out of the country at any given time (hence the prevalence of USD trading with China: the USD is a more liquid currency). CNH is the offshore  currency which came into being in 2009 as the People’s Bank of China started  to internationalize its currency. While the two are roughly equivalent, they trade at slightly different rates on any given day.  

Commodity currency: Currency of a country whose economy is dependent  on a raw material or commodity, like oil, gas, or minerals. These currencies tend  to move with the prices of the raw material; a rise in price of the commodity will  typically lift the currency.  

Cross-currency: Any currency pair NOT involving the USD, which is currently  the most widely traded currency in the world. This could be as liquid a pair  as EUR/GBP or involve a minor or exotic currency. Not every provider can  efficiently accommodate cross-currency trades. 

Cross-currency trading: Given the prevalence of the US dollar as the global  reserve currency, a ‘cross’ is any currency pair that does NOT include USD. For  example, a GBP/EUR pair is a cross. 

Cryptocurrency: A digital currency or medium of exchange that is not issued  by a central bank and that does not typically exist in a physical form. Cryptos  are traded on an immutable, decentralized and encrypted ledger (blockchain) to  trace movement and to prevent traders from issuing their own coins.  

Currency hedging: Planning and implementing policies designed to minimize risk, add certainty, and temper the effects of adverse market movement in cross border transactions. 

Currency options: A structured financial contract that gives you the right (but not the obligation) to purchase currency at a fixed rate at some time in  the future, protecting the downside but allowing you to take advantage of the  upside should the market move in your favor. Options can be structured with a  premium or without. 

Dead cat bounce: An upturn in a seemingly implacable downward trend.  While sometimes It signals a recovery, more often it’s a temporary lift before the  continued downward march. The name comes from the concept that even a  dead cat will bounce when dropped from a lofty-enough height. 

Euro / common currency / Fibre: The trading currency of 19 member  nations of the European Union. The member nations who trade their own  

currency instead of the euro are Bulgaria, Croatia, Czech Republic, Denmark,  Hungary, Poland, Romania, and Sweden. 

Exchange rate: The rate differential between two currencies in a pair. Assume  the base currency equals 1; the rate represents the cost, in the base currency,  of one unit of the quote currency. A USD/GBP rate of 1.2500 means that each Pound costs $1.25.  

Fiat Money / Fiat Currency: Currency issued by a central bank and backed  by the full faith and credit of the government.  

Fiscal policy: A governmental policies, separate from the Central Bank  policies, with respect to taxing and spending. 

Flexible forward contract: A commitment to buy foreign currency at a fixed  exchange rate within a specific date range. It can be drawn down at any time for  recurring payments obligations. 

Forward contracts can also help you protect the value of incoming payments,  by locking in the rate at which you will exchange the foreign currency for your  home currency when it is paid to you. 

Forward contract (forward exchange contract): A commitment to buy  a foreign currency at a fixed exchange rate on a specific date to fulfill a future  obligation, without tying up all your cash flow (a small deposit may be required).  Depending on the currencies, you can book forward contracts for any length of  time up to 24 months. 

Forward points: Based on interest rate differentials between two currencies,  a number of basis points are added to or subtracted from the spot rate. If the  currency you are buying has a higher interest rate than the one you are selling,  you will subtract forward points. When it comes time to repatriate the currency,  you will add forward points based on the then-current interest rate differential. 

Fundamental analysis: measuring value of an asset or equity on the basis of its financial position and performance versus its trading price. (Contrast “technical analysis”)

Gold Standard: Prior to the Bretton Woods Agreement, countries guaranteed  their currency would be redeemable in gold at a set value. After WWII, gold  was scarce and the Bretton Woods agreement pegged other participants’  currencies against the USD. 

Greenback / Buck: The US dollar. Greenback because it’s green; “buck”  because deerskin or buckskin was the medium of exchange when the US was  being settled and before the west was won. 

Hawkish / Dovish: Differences in monetary policy. A “hawkish” stance usually  accompanies a stronger economy, where the monetary authority uses the levers  of raising interest rates to curb inflation, and/or tightening balance sheets,  which often results in some appreciation in the currency. A “dovish” approach is  designed to stimulate an economy in times of slower growth, lowering interest  rates, increasing the balance sheet through quantitative easing. And usually  results in a weakening currency. 

Hedging: General term for tactics used to protect a position in a currency pair  from future movement in exchange rates. If you believe the Euro will rise against  the dollar, you can contract to buy Euros at the current price on a specified date in the future (going long). When you are “long” in one currency, you are “short”  the other in the pair.  

IMF’s Basket of Currencies: Five currencies included in the International  Monetary Fund’s “supplementary reserve asset” to supplement members  

reserves. The ‘basket’ currencies have to meet two criteria: the export criterion  and the freely usable criterion, and include the US dollar, the euro, the British  pound, and the Japanese yen. The Chinese renminbi was included effective October 2016.  

Inflation / Deflation: Inflation indicates a rise in the price level in an  

economy (a nicer way of saying a decline in purchasing power), while deflation  is the opposite: the decline in pricing level because of a surplus or goods or a  dearth of money to buy them. In a nod to the Three Bears, stagflation occurs  at a period of slow economic growth coupled with high inflation and high unemployment.  

Interbank rate: The published rate for currency conversion, based on what the biggest banks charge each other. Consumer and business rates will typically be higher than the interbank. And rates change continually. 

Interest rate differential: the difference between the interest rates of two  similar assets. You might sell an asset with a low interest rate to buy one with a  higher interest rate. In foreign exchange, the Interest rate differential is used to  calculate forward points for a forward exchange contract. If one currency in the  pair has an interest rate of 3% and the other, 1%, the IRD is 2%.  

Interest rates: Essentially, the cost of money—what a lender charges a  

borrower above the price of an asset or a loan for the use of that asset. Riskier  loans have typically higher interest rates; lower-risk loans have lower interest rates. 

Leverage: the amount of debt one holds. 

Long / Short: A ‘long’ position is held by an optimist; a short position, by a  pessimist. With a long position, the investor holds the assets in the expectation  their value will increase. “short’ sellers sell an asset they have borrowed (or does  not yet own) on the hope (or expectation) that it will decline in value so they can  buy the asset at a lower price when it’s time to deliver.  

Kiwi: the New Zealand dollar, nicknamed for the flightless bird native to New  Zealand.  

Loonie: the Canadian dollar (CAD), nicknamed for the bird that appears on  the one-dollar coin. Lesser known is the nickname Toonie, for the two-dollar  coin which uses two different metals. Another little-known fact: Canada stopped  producing pennies in 2012 because each one cost more than a penny to make.  Perhaps that is why so many are found in US tills and coin jars. At the other  extreme, the Royal Canadian Mint produced the world’s first million-dollar coin  in 2007. The 100 kg, 99.999% pure gold bullion coin with a $1 million face  value has a current nominal value around $6 million.  

Market order / Rate order: Allows you to manage any currency fluctuations  by choosing a target buy or sell rate. Orders can sit in the market for any length  of time, but are traditionally limited to 14 days.  

Mark-to-market: An accounting method that values assets or liabilities at the  market rate as if it were to be sold or covered that day. Also called ‘fair value’  accounting. 

Monetary policy: How a central bank regulates the economy to achieve  specific goals. Tools include adjusting interest rates, increasing or tightening  money supply, buying up assets to provide liquidity, lower or raise rates of  inflation, or to stimulate economic growth. 

Multi-currency holding account: The ability to hold different currencies in  a single account without separate foreign-denominated bank accounts. This  allows you to exchange one currency to fulfill an obligation in another, or to  fund a payment from a currency balance, without having to convert to your  home currency first. 

Netting: The act of two or more counterparties with multiple payment flows  between them aggregating payables and receivables into a single payable or  receivable per currency.  

Non-deliverable Forward (NDF): A forward contract where the currency is  not actually exchanged, but the difference between the notional and the spot rate  is settled each day (or marked to market). This is used primarily when one side  of the agreement involves a currency subject to currency controls or that is not  widely traded.

PIP: The incremental change in a foreign exchange quote. Most currency  quotations are priced to four decimal places; the pip is the final digit. It’s actually  an acronym for “percentage in point.”  

Quantitative Easing: A central bank’s practice of buying up assets to  increase the money supply and stimulate economic growth (QE and QE2 also  may refer to the UK’s Queen Elizabeth and the ocean liner named after her). 

Resistance / Support: Measures used in technical analysis, the range  between which a currency or other asset might trade, resistance being the top  (ceiling) and the support, the bottom (or the floor). A currency is said to be  ‘range-bound’ if it remains between those technical barriers. If it breaks the top  or bottom, look out: it may be in for a bigger move up or down.  

Reserve currency: A currency held in significant quantities by central banks  and other monetary authorities as part of their foreign exchange reserves. See  ‘safe-haven currency.”  

Renminbi: the currency of the People’s Republic of China (renminbi means  the people’s money and was so named in 1949). The Yuan, a much older term  meaning ‘dollar’, is also the name of the unit in which RMB is denominated.  While the two terms are used almost interchangeably, the popular analogy is  that Pound Sterling (the official name of the British Pound) is to Renminbi as  Pound is to Yuan (what you might spend every day).  

Risk-on / Risk-off: An indicator of confidence in a market. In a risk-on  situation, there is more confidence. A Risk-off situation sees traders heading  for the hills and reducing risk by looking for safe havens . Risk-on currencies  include the commodity currencies (CAD, AUD, NZD, NOK, ZAR are some  examples) and emerging market currencies. 

Safe haven currency: A currency that is expected to hold its value in times of economic uncertainty or stress. Safe havens include the Swiss Franc, the  Japanese Yen, and the U.S. Dollar. 

Spot transaction: Purchase of a foreign currency at the prevailing rate to  settle a one-time payment for delivery the same day, one day or two days ahead. 

Spread: The difference between the interbank rate and what a business or  individual will be charged for a currency purchase or sale. Spreads can vary  depending on the volume and frequency of the payments, and the currency pair  itself. Spreads on less widely traded currencies are typically greater than for  more liquid currencies.  

Sterling: The official name of the British Pound (GBP) is Pound Sterling— deriving from the original coin’s weight of one troy pound of silver. The Pound  Sterling is the oldest currency in continuous use.  

Swissy: The Swiss franc 

Technical analysis: Based on trading patterns of a stock, currency or asset,  rather than absolute value.  

The Fed: The U.S. Federal Reserve Bank. 

Tenor: The length of time to maturity for a contract. 

The Old Lady (not to be confused with the Gray Lady): The Bank  of England. The Gray Lady refers to the New York Times. (Another fun fact: the “little gray lady” refers to Nantucket, a small island off the coast of  Massachusetts which was a major force in the whaling trade in the 18th and  19th centuries). 

Trade balance: The contrast between the amount of goods sold abroad  (exports) and the amount of goods purchased from abroad (imports). China is a  net exporter while the United States is a net importer. 

Trade surplus/deficit: A country enjoying a trade surplus exports more than  it imports. A country importing more than it exports shows a trade deficit. 

Velocity of money: A measure economists use to measure the vitality of an  economy: it’s the rate at which money is exchanged.  

Volatility: the movement of the value of a particular asset or currency in a pair.  The higher the volatility, the riskier the trade. While low volatility can add stability  to import and export pricing, Forex traders find it dull. 

VIX (volatility index): The measure of expected volatility in the stock market,  originated by the Chicago Board of Options Exchange as a way to gauge risk  and market expectation for the next 30 days. VIX is also the ticker symbol for  the tradable derivative based on the Index. Also called the “Fear Index” or “Fear  Gauge”. 

Zero-bound: A lowering of central banking interest rates to zero, which limits  the bank’s latitude in using monetary policy to stimulate the economy.

Sources:

  1. AFEX
  2. Finance Illustrated 
  3. Investopedia
  4. Risk.net