Currency pair
Encyclopedia
A currency pair is the quotation of the relative value of a currency
unit against the unit of another currency in the foreign exchange market
. The currency that is used as the reference is called the counter currency or quote currency and the currency that is quoted in relation is called the base currency or transaction currency.
Currency pairs are written by concatenating the ISO currency codes (ISO 4217) of the base currency and the counter currency, separating them with a slash character. Often the slash character is omitted. A widely traded currency pair is the relation of the euro
against the US dollar, designated as EUR/USD. The quotation EUR/USD 1.2500 means that one euro is exchanged for 1.2500 US dollars.
The most traded currency pairs in the world are called the Majors. They involve the currencies euro
, US dollar, Japanese yen
, pound sterling
, Australian dollar
, Canadian dollar
, and the Swiss franc
.
(ISO) in standard ISO 4217
. The major currencies and their designation in the foreign exchange market are the US dollar (USD), euro
(EUR), Japanese yen
(JPY), British pound (GBP), Australian dollar
(AUD), Canadian dollar
(CAD), and the Swiss franc
(CHF).
The quotation EUR/USD 1.2500 means that one euro is exchanged for 1.2500 US dollars. If the quote changes from EUR/USD 1.2500 to 1.2510, the euro has increased in relative value, because either the dollar buying strength has weakened or the euro has strengthened, or both. On the other hand, if the EUR/USD quote changes from 1.2500 to 1.2490 the euro is relatively weaker than the dollar.
From its inception in 1999 and as stipulated by the European Central Bank
, the euro has first precedence as a base currency. Therefore, all currency pairs involving it should use it as their base, listed first. For example, the US dollar and euro exchange rate is identified as EUR/USD.
Although there is no standards setting body or ruling organization, the established priority ranking of the major currencies is:
Historically, this was established by a ranking according to the relative values of the currencies with respect to each other , but the introduction of the euro and other market factors have broken the original price rankings.
Other currencies (the Minors) are generally quoted against one of the major currencies.
The term base currency in the foreign exchange field is also used as the accounting currency by banks, and is usually the domestic currency. For example, a British bank may use GBP as a base currency for accounting, because all profits and losses are converted to the sterling. If a EUR/USD position is closed out with a profit in USD by a British bank, then the rate-to-base will be expressed as a GBP/USD rate. This ambiguity leads many market participants to use the expressions currency 1 (CCY1) and currency 2 (CCY2), where one unit of CCY1 equals the quoted number of units of CCY2.
.
The Majors are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD.
, which has its origins from the time when a communications cable
under the Atlantic Ocean
synchronized the GBP/USD quote between the London and New York markets. The following nicknames are common: Fiber for EUR/USD, Chunnel for EUR/GBP, Loonie and The Funds for USD/CAD, Matie and Aussie for AUD/USD, Geppie for GBP/JPY, and Kiwi for the New Zealand Dollar NZD/USD pairing. Nicknames vary between the trading centers in New York, London, and Tokyo.
The officially quoted rate is a spot price
. In a trading market however, currencies are offered for sale at an offering price (the ask price), and traders looking to buy a position seek to do so at their bid price, which is always lower or equal to the asking price. This price differential is known as the spread. For example, if the quotation of EUR/USD is 1.3607/1.3609, then the spread is USD 0.0002, or 2 pips
. In general, markets with high liquidity exhibit smaller spreads than less frequently traded markets.
The spread offered to a retail customer with an account at a brokerage firm, rather than a large international forex market maker
, is larger and varies between brokerages. Brokerages typically increase the spread they receive from their market providers as compensation for their service to the end customer, rather than charge a transaction fee. A bureau de change
usually has spreads that are even larger.
Example:- lets consider EUR / USD currency pair
EUR / USD -- 1.33
Base currency/Quote currency
In the above case if you are buying 1EUR you will have to pay 1.33 USD conversely if you are selling 1EUR you will receive 1.33 USD (assuming no FX spread).
Forex traders Buy EUR / USD pair if they believe that EUR would increase in value relative to USD, buying EUR / USD pair this way is called going long on the pair; converseley, would sell EUR / USD pair called going short on the pair, if they believe the value of EUR will go down relative to USD. It is noteworthy, that a pair is depicted only oneway and never reversed for the purpose of a trade, but a buy or sell function is used at initiation of a trade. Buy a pair if bullish on the first position as compared to the second of the pair; conversely, sell if bearish on the first as compared to the second.
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
unit against the unit of another currency in the foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
. The currency that is used as the reference is called the counter currency or quote currency and the currency that is quoted in relation is called the base currency or transaction currency.
Currency pairs are written by concatenating the ISO currency codes (ISO 4217) of the base currency and the counter currency, separating them with a slash character. Often the slash character is omitted. A widely traded currency pair is the relation of the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
against the US dollar, designated as EUR/USD. The quotation EUR/USD 1.2500 means that one euro is exchanged for 1.2500 US dollars.
The most traded currency pairs in the world are called the Majors. They involve the currencies euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
, US dollar, Japanese yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
, pound sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
, Australian dollar
Australian dollar
The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
, Canadian dollar
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
, and the Swiss franc
Swiss franc
The franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...
.
Syntax and quotation
Currency quotations use the abbreviations for currencies that are prescribed by the International Organization for StandardizationInternational Organization for Standardization
The International Organization for Standardization , widely known as ISO, is an international standard-setting body composed of representatives from various national standards organizations. Founded on February 23, 1947, the organization promulgates worldwide proprietary, industrial and commercial...
(ISO) in standard ISO 4217
ISO 4217
ISO 4217 is a standard published by the International Standards Organization, which delineates currency designators, country codes , and references to minor units in three tables:* Table A.1 – Current currency & funds code list...
. The major currencies and their designation in the foreign exchange market are the US dollar (USD), euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
(EUR), Japanese yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
(JPY), British pound (GBP), Australian dollar
Australian dollar
The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
(AUD), Canadian dollar
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
(CAD), and the Swiss franc
Swiss franc
The franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...
(CHF).
The quotation EUR/USD 1.2500 means that one euro is exchanged for 1.2500 US dollars. If the quote changes from EUR/USD 1.2500 to 1.2510, the euro has increased in relative value, because either the dollar buying strength has weakened or the euro has strengthened, or both. On the other hand, if the EUR/USD quote changes from 1.2500 to 1.2490 the euro is relatively weaker than the dollar.
Base currency
The rules for formulating standard currency pair notations result from accepted priorities attributed to each currency.From its inception in 1999 and as stipulated by the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
, the euro has first precedence as a base currency. Therefore, all currency pairs involving it should use it as their base, listed first. For example, the US dollar and euro exchange rate is identified as EUR/USD.
Although there is no standards setting body or ruling organization, the established priority ranking of the major currencies is:
- EuroEuroThe euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
- Pound sterlingPound sterlingThe pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
- Australian dollarAustralian dollarThe Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
- New Zealand dollarNew Zealand dollarThe New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands , Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents....
- United States dollarUnited States dollarThe United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
- Canadian dollarCanadian dollarThe Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
- Swiss francSwiss francThe franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...
- Japanese YenJapanese yenThe is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
Historically, this was established by a ranking according to the relative values of the currencies with respect to each other , but the introduction of the euro and other market factors have broken the original price rankings.
Other currencies (the Minors) are generally quoted against one of the major currencies.
The term base currency in the foreign exchange field is also used as the accounting currency by banks, and is usually the domestic currency. For example, a British bank may use GBP as a base currency for accounting, because all profits and losses are converted to the sterling. If a EUR/USD position is closed out with a profit in USD by a British bank, then the rate-to-base will be expressed as a GBP/USD rate. This ambiguity leads many market participants to use the expressions currency 1 (CCY1) and currency 2 (CCY2), where one unit of CCY1 equals the quoted number of units of CCY2.
The Majors
The most traded pairs of currencies in the world are called the Majors. They constitute the largest share of the foreign exchange market, about 85%, and therefore they exhibit high market liquidityMarket liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
.
The Majors are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD.
Nicknames
In everyday foreign exchange market trading and news reporting, the currency pairs are often referred to by nicknames rather than their symbolic nomenclature. These are often reminiscent of national or geographic connotations. The GBP/USD pairing is known by traders as the cableCable (foreign exchange)
Cable is a foreign exchange term used for the GBP/USD currency pair rate . It derives its name from the Transatlantic Cable, a steel cable laid under the Atlantic Ocean in 1858, telegraphically linking the UK with the USA, enabling messages with currency prices to be transmitted between the London...
, which has its origins from the time when a communications cable
Transatlantic telegraph cable
The transatlantic telegraph cable was the first cable used for telegraph communications laid across the floor of the Atlantic Ocean. It crossed from , Foilhommerum Bay, Valentia Island, in western Ireland to Heart's Content in eastern Newfoundland. The transatlantic cable connected North America...
under the Atlantic Ocean
Atlantic Ocean
The Atlantic Ocean is the second-largest of the world's oceanic divisions. With a total area of about , it covers approximately 20% of the Earth's surface and about 26% of its water surface area...
synchronized the GBP/USD quote between the London and New York markets. The following nicknames are common: Fiber for EUR/USD, Chunnel for EUR/GBP, Loonie and The Funds for USD/CAD, Matie and Aussie for AUD/USD, Geppie for GBP/JPY, and Kiwi for the New Zealand Dollar NZD/USD pairing. Nicknames vary between the trading centers in New York, London, and Tokyo.
Cross pairs
The currency pairs that do not involve the US dollar are called cross currency pairs, such as GBP/JPY. Pairs that involve the euro are often called euro crosses, such as EUR/GBP.Trading
Currencies are traded in fixed contract sizes, specifically called lot sizes, or multiples thereof. The standard lot size is 100,000 units of the base currency. Many retail trading firms also offer 10,000 unit (mini lot) trading accounts.The officially quoted rate is a spot price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
. In a trading market however, currencies are offered for sale at an offering price (the ask price), and traders looking to buy a position seek to do so at their bid price, which is always lower or equal to the asking price. This price differential is known as the spread. For example, if the quotation of EUR/USD is 1.3607/1.3609, then the spread is USD 0.0002, or 2 pips
Percentage in point
In finance, a percentage in point is the smallest commonly quoted change of an exchange rate of a currency pair.The major currencies, except the Japanese yen, are priced to four decimal places. For these currencies a pip is one unit of the fourth decimal point, or 1/100th of one percent...
. In general, markets with high liquidity exhibit smaller spreads than less frequently traded markets.
The spread offered to a retail customer with an account at a brokerage firm, rather than a large international forex market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
, is larger and varies between brokerages. Brokerages typically increase the spread they receive from their market providers as compensation for their service to the end customer, rather than charge a transaction fee. A bureau de change
Bureau de Change
A bureau de change or currency exchange is a business whose customers exchange one currency for another. Although originally French, the term bureau de change is widely used throughout Europe, and European travellers can usually easily identify these facilities when in other European countries...
usually has spreads that are even larger.
Example:- lets consider EUR / USD currency pair
EUR / USD -- 1.33
Base currency/Quote currency
In the above case if you are buying 1EUR you will have to pay 1.33 USD conversely if you are selling 1EUR you will receive 1.33 USD (assuming no FX spread).
Forex traders Buy EUR / USD pair if they believe that EUR would increase in value relative to USD, buying EUR / USD pair this way is called going long on the pair; converseley, would sell EUR / USD pair called going short on the pair, if they believe the value of EUR will go down relative to USD. It is noteworthy, that a pair is depicted only oneway and never reversed for the purpose of a trade, but a buy or sell function is used at initiation of a trade. Buy a pair if bullish on the first position as compared to the second of the pair; conversely, sell if bearish on the first as compared to the second.