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Currency pair

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, quote currency or currency [1] and the currency that is quoted in relation is called the base currency or transaction currency.

Currency pairs are sometimes then 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, alternatively the slash may be replaced by an etc. 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. Here, EUR is the base currency and USD is the quote currency(counter currency). This means that 1 Euro can be exchangeable to 1.25 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.

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Currency quotations use the abbreviations for currencies that are prescribed by the International Organization for Standardization (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).

As has been mentioned previously, the quotation EUR/USD 1.2500 (or EURUSD 1.2500) means that one euro is exchanged for 1.2500 US dollars. If the quote changes from EUR/USD 1.2500 (or EURUSD 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 (or EURUSD) quote changes from 1.2500 to 1.2490 the euro has become relatively weaker than the dollar.

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, 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. [4]

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 [5] , but the introduction of the euro and other market factors have broken the original price rankings. For example, while historically Japanese yen would rank above Mexican peso, the quoting convention for these is now MXNJPY, i.e. Mexican peso has higher priority than Japanese yen.

Other currencies (the Minors) are generally quoted against USD. Quotes against currencies other than USD are referred to as currency crosses, or simply crosses. The most common crosses are EUR, JPY, and GBP crosses, but may be against any other currency. The rates are almost universally derived, however, by taking the first currency's rate against the USD and multiplying/dividing by the second currency's rate against the USD.

Sometimes the term base currency may also refer to the functional currency of a bank or company; usually their domestic currency. For example, a British bank may use GBP as a base currency for accounting, because all profits and losses are converted to 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 most traded pairs of currencies in the world are called the Majors. They constitute the largest share of the foreign exchange market, about 85%, [6] and therefore they exhibit high market liquidity.

The Majors are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD. [6]

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 cable (also the cable), 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. GBP is also referred to by traders as quid. The following nicknames are common: "Swissy" or "Euro-Swissy" for EUR/CHF, Fiber for EUR/USD, Chunnel for EUR/GBP, Loonie and The Funds for USD/CAD, Aussie for AUD/USD, Gopher for USD/JPY, Guppy for GBP/JPY, Yuppy for EUR/JPY, and Kiwi or The Bird for the New Zealand Dollar NZD/USD pairing. New innovations include Barney for USD/RUB and Betty for EUR/RUB after the fictional characters the Rubbles in The Flintstones. [7] Additionally, exotic pairs have earned more esoteric nicknames such as "Glock" for COP/SGN after the service pistol often carried by police officers (the ticker can be viewed as (Cop's G(u)n)) [ citation needed ] [ disputed (for: SGN currency appears spurious) – discuss ] . Nicknames vary between the trading centers in New York, London, and Tokyo. Care should be taken with the use of 'Betty, for EUR/RUB as, in London markets 'Betty' is used as cockney slang for Cable as in Betty Grable = Cable = GBP/USD. [8]

The currency pairs that do not involve USD [9] are called cross currency pairs, such as GBP/JPY. Pairs that involve the euro are often called euro crosses, such as EUR/GBP.

Currencies are traded in fixed contract sizes, specifically called lot sizes, or multiples thereof. The standard lot size is 100,000 units. Many retail trading firms also offer 10,000-unit (mini lot) trading accounts and a few even 1,000-unit (micro lot).

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. [10] 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. [11]

Example: consider EUR/USD currency pair traded at a quotation of 1.33

In the above case, someone buying 1 EUR will have to pay 1.33 USD; conversely one selling 1 EUR will receive 1.33 USD (assuming no FX spread). Forex traders buy EUR/USD pair if they believe that the Euro would increase in value relative to the US dollar, buying EUR/USD pair; this way is called going long on the pair; conversely, would sell EUR/USD pair, called going short on the pair, if they believe the value of the Euro will go down relative to the US dollar. A pair is depicted only one way 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.

Buying And Selling Currency Pairs

Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer, and are traded in pairs.

For example the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

Imagine each currency pair constantly in a “tug of war” with each currency on its own side of the rope. Exchange rates fluctuate based on which currency is stronger at the moment.

Major Currency Pairs

The currency pairs listed below are considered the “majors.

These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded.

The majors are the most liquid and widely traded currency pairs in the world.

Major Cross-Currency Pairs or Minor Currency Pairs

Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the “crosses.”

Major crosses are also known as “minors.”

Euro Crosses

Yen Crosses

Pound Crosses

Other Crosses

Exotic Currency Pairs

No, exotic pairs are not exotic belly dancers who happen to be twins. Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico or Hungary.

Depending on your forex broker, you may see the following exotic currency pairs so it’s good to know what they are.

Keep in mind that these pairs aren’t as heavily traded as the “majors” or “crosses,” so the transaction costs associated with trading these pairs are usually bigger.

Currency Pair

What is a 'Currency Pair'

A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency.

Base Currency

Major Pairs

Currency Pair: EUR/USD (Euro/U.S. .

Cross Currency

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BREAKING DOWN 'Currency Pair'

Currency pairs compare the value of one currency to another — the base currency (or the first one) versus the second, or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency. Currencies are identified by an ISO currency code, or their three-letter alphabetic code they are associated with on the international market. So, for the U.S. dollar, the ISO code would be USD.

The Basics of Currency Pairs

Trading of currency pairs are conducted in the foreign exchange market, also known as the forex market. It is the largest and most liquid market in the financial world. This market allows for the buying, selling, exchanging and speculation of currencies, but also allows for the conversion of currencies for international trade and investment. The forex market is open 24 hours a day, five days a week (except holidays), and sees a huge amount of trading volume.

All forex trades involve the simultaneous purchase of one currency and sale of another, but the currency pair itself can be thought of as a single unit — an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and implicitly sell the quoted currency. The bid (buy price) represents how much of the quote currency you need to get one unit of the base currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency.

Unlike the stock or commodity market, you trade currencies, which means you're selling one currency to buy another. For stocks and commodities, you're using cash to buy an ounce of gold or one share of Apple stock.

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