The Learn About Futures Insider For May 19, 2011: Euro Currency

[Guest Katie Gray]

Named in 1995, and introduced in 1999, the euro is the official currency of more than half of the member countries of the European Union. According to the International Monetary Fund (IMF), the euro zone may represent the second largest economy in the world, a likely driving force behind the apparent interest in the exchange of this currency. The following contract specifications will refer to the Euro/US Dollar contract from the foreign exchange futures listings from the CME Group.

Contract Size: 125,000 euro

Price Quote & Tick Size: $.0001 per euro increments ($12.50/contract). $.00005 per euro increments ($6.25/contract) for EUR/USD futures intra-currency spreads executed on the trading floor and electronically, and for AON transactions.

Contract Months: March, June, September, December

Trading Specs: Open outcry is 7:20 a.m.-2:00 p.m. and Globex hours are Sundays: 5:00 p.m. - 4:00 p.m. Central Time (CT) next day. Monday - Friday: 5:00 p.m. - 4:00 p.m. CT the next day, except on Friday - closes at 4:00 p.m. and reopens Sunday at 5:00 p.m. CT.

Daily Price Limit: Consult exchange.

Trading Symbols: EC, 6E on Globex

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

Euro Facts

 

The euro replaced the European Currency Unit on the world financial market in January of 1999; however, the euro banknotes and coins did not enter circulation until three years later. It is divided in a similar fashion to dollars with each euro divided into one hundred cents. To distinguish these cents, the moniker euro-cents is occasionally applied. The euro is currently the sole currency of the following member states of the European Union (EU) and these are collectively referred to as the "eurozone":

* Austria

* Belgium

* Cyprus

* Estonia

* Finland

* France

* Germany

* Greece

* Ireland

* Italy

* Luxemburg

* Malta

* The Netherlands

* Portugal

* Slovakia

* Slovenia

* Spain

Other nations have pledged to adopt the euro at some point. To participate in the currency, member states had to meet certain criteria. These criteria included strict debt ratio and inflation parameters, as well as having to have an interest rate close to that of the EU average.

Euro administration and management fall to the European Central Bank (ECB) which is based out of Frankfurt. Like many central banks, the ECB sets monetary policy. The euro is the second most common reserve currency, meaning it is held as part of foreign exchange reserves by many governments and institutions. It is also considered a hard currency, one which is perceived as a reliable store of value and is globally traded. Several countries outside the Eurozone have pegged their currency directly to the euro.

As with many other central banks, the ECB sets interest rates, attempts to maintain price stability, and promote smooth operation for member banks. Key information is frequently updated on the ECB's official website.

The EU is often represented as a single entity in terms of its economy. Many official statistics for this area come from Eurostat, including agricultural, financial, energy, and labor themes. Many of these releases are offered free of charge on their official website.

Among the key economic notes for the EU, it may be important to bear in mind the following:

- The EU has large coal, oil, and natural gas reserves. The North Sea Oilfields may be of primary interest.

- The EU is the largest exporter in the world.

- It is also the second largest importer.

- Manufacturing makes up roughly 28.4 percent of the GDP and the services sector accounts for 69.4 percent. Agriculture comes in at 2.3 percent.

- Tourism is an important part of the EU's economy

Key terms for this market include:

EMS - European Monetary System - simplified, this refers to an arrangement in which countries linked their currencies to try to prevent large relative fluctuations.

EFSF - European Financial Stability Facility - a creation aimed at providing loans to Eurozone countries facing financial crises following the global economic downturn.

Key Uses

 

Besides the obvious implications and uses for currency, the euro has investing applications as well. As a financial instrument, euro futures are often used as a means to hedge currency exchange risk. Since the euro is such a huge part of international trade, this can be a significant market for other businesses as well.

Key Concerns

 

Several factors within a nation can have a significant effect on the currency exchange rates and the relative importance of each is the subject of debate, however, it is important to be aware of some of the key fundamentals.

Inflation: It is generally believed that countries with consistently lower inflation exhibit a rising currency value while countries with higher inflation may see currency depreciation.

Interest Rates: High interest rates may attract foreign investors and that can lead to an exchange rate increase while the opposite scenario is possible in a country with low interest rates.

Overall Economic Conditions: Everything from a country's balance of trade to the size of their deficit or surplus can serve as a barometer of the condition of the country and the likelihood of default. Investors look for countries with stronger economic foundations and the better the economic foundation of one country versus another may increase the value of the country's currency.

Perception: The so called "flight to quality" exists within foreign currencies as investors will often seek what they perceive as "safe haven" currencies during times of political or economical instability.

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