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FX Currency Futures Contract

FX stands for foreign exchange currency and FX currency futures contract are based on the underlying currency in the contract.

The most popular currencies traded are Euro €, British Pound £, Swiss Franc , Japanese Yen ¥, Australian Dollar $, Canadian Dollar $, New Zealand Dollar $, Renminbi ¥ and Mexican PESO $.

FX Currency Futures Contract

Foreign exchange reserves by currency for 2001 - 2010

These currencies also made up large portions of the foreign exchange reserves in the world.

Relative Value of Currency

As the value of a currency is relative to the value of another currency, FX currency futures are usually quoted against the US Dollar $, or the Japanese Yen ¥. For example, the current exchange rate for Euro to US Dollar is 1.4500. ie. 1 Euro is equal to 1.45 US Dollar.  The value of Euro FX currency futures contract is the same as the exchange rate for Euro to US Dollar. ie. 1.4500.

When you long the Euro FX currency futures contract, you are expecting the exchange rate of 1.45 to go up, possibly to 1.47 or 1.48. When you short the Euro FX currency futures contract, you are expecting the exchange rate of 1.45 to go down, possibly to 1.41 or 1.42.

Types of FX Currency Futures Contract

Commodity Currencies

Australian Dollar, Canadian Dollar and New Zealand Dollar are known as commodity currencies. The value of the commodity currency is closely related to a commodity. When the price of the commodity rises, the value of the currency also rises.

For example, when gold price rises, the value of the Australian Dollar and New Zealand Dollar also rises. Similarly, when oil price rises, the Canadian Dollar also strengthens.

Speculators Currencies

The Japanese Yen, Euro, British Pound, and Swiss Franc are heavily traded by speculators. The Japanese Yen is traded mostly by the Asian markets. The Euro, British Pound, and Swiss Franc are traded in the European and United States markets.

Whether the large speculators are long or short a FX currency futures is published knowledge. This information can be found at the commitment of traders (COT) report at the US Commodity Futures Trading Commission (CFTC) website.  The COT report is published every Tuesday.

As the FX currency futures contract are traded in the Chicago Mercantile Exchange (CME), you will look for the report under “Chicago Mercantile Exchange” and “Futures Only”.

CFTC Commitment of Traders Report for Foreign Exchange

Source: US Commodity Futures Trading Commission

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With China becoming more involved in international trades, the Renminbi is a currency to watch out for in the next ten years from 2011 if you want to trade in FX currency futures contract.

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