A currency pair is the dyadic quotation of the relative value of a
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
unit against the unit of another currency in the
foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
. The currency that is used as the reference is called the counter currency, quote currency, or
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
and the currency that is quoted in relation is called the base currency or transaction currency.
Currency pairs are generally written by concatenating the
ISO currency code
ISO 4217 is a standard published by the International Organization for Standardization (ISO) that defines alpha codes and numeric codes for the representation of currencies and provides information about the relationships between individual ...
s (ISO 4217) of the base currency and the counter currency, and then separating the two codes with a slash. Alternatively the slash may be omitted, or replaced by either a dot or a dash. A widely traded currency pair is the relation of the
euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
against the
US dollar
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
, designated as
EUR
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens ...
/
USD
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
. 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
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
,
US dollar
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
,
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 (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
,
pound sterling
Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, and t ...
,
Australian dollar
The Australian dollar (sign: $; code: AUD) is the currency of Australia, including its external territories: Christmas Island, Cocos (Keeling) Islands, and Norfolk Island. It is officially used as currency by three independent Pacific Island s ...
,
Canadian dollar
The Canadian dollar ( symbol: $; code: CAD; french: dollar canadien) is the currency of Canada. It is abbreviated with the dollar sign $, there is no standard disambiguating form, but the abbreviation Can$ is often suggested by notable style ...
, and the
Swiss franc
The Swiss franc is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) issues banknotes and the f ...
.
Syntax and quotation
Currency quotations use the abbreviations for currencies that are prescribed by the
International Organization for Standardization
The International Organization for Standardization (ISO ) is an international standard development organization composed of representatives from the national standards organizations of member countries. Membership requirements are given in Ar ...
(ISO) in standard
ISO 4217
ISO 4217 is a standard published by the International Organization for Standardization (ISO) that defines alpha codes and numeric codes for the representation of currencies and provides information about the relationships between individual cu ...
. 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 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 by 10 pips (
Percentage in point
In finance, specifically in foreign exchange markets, a percentage in point or price interest point (pip) is a unit of change in an exchange rate of a currency pair.
The major currencies (except the Japanese yen) are traditionally priced to fou ...
), 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.
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
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#Intern ...
, 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:
# euro
# pound sterling
# Australian dollar
# United States dollar
# Canadian dollar
# Swiss franc
# Japanese yen
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. 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 major 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 a major currency crossed with 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 Functional currency refers to the main currency used by a business or unit of a business. It is the monetary unit of account of the principal economic environment in which an economic entity operates.
International Accounting Standards (IAS) and ...
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 Majors
The most traded pairs of currencies in the world are called the ''Majors''. They constitute the largest share of the foreign
exchange market
An exchange, bourse (), trading exchange or trading venue is an organized market where (especially) tradable securities, commodities, foreign exchange, futures, and options contracts are bought and sold.
History
12th century: Brokers on the ...
, about 85%,
and therefore they exhibit high
market liquidity
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...
.
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
''cable'' (also ''the cable''), which has its origins from the time when a
communications cable
In electrical engineering, a transmission line is a specialized cable or other structure designed to conduct electromagnetic waves in a contained manner. The term applies when the conductors are long enough that the wave nature of the transmi ...
under the
Atlantic Ocean
The Atlantic Ocean is the second-largest of the world's five oceans, with an area of about . It covers approximately 20% of Earth's surface and about 29% of its water surface area. It is known to separate the " Old World" of Africa, Europe ...
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 pairing. New innovations include ''Barney'' for USD/RUB and ''Betty'' for EUR/RUB after the fictional characters the Rubbles in
The Flintstones
''The Flintstones'' is an American animated sitcom produced by Hanna-Barbera Productions. The series takes place in a romanticized Stone Age setting and follows the activities of the titular family, the Flintstones, and their next-door neighb ...
. 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 Rhyming slang
Rhyming slang is a form of slang word construction in the English language. It is especially prevalent among Cockneys in England, and was first used in the early 19th century in the East End of London; hence its alternative name, Cockney rhymin ...
for ''cable'' (as in:
Betty Grable
Elizabeth Ruth Grable (December 18, 1916 – July 2, 1973) was an American actress, pin-up girl, dancer, model, and singer.
Her 42 films during the 1930s and 1940s grossed more than $100 million; for 10 consecutive years (1942–1951) she reign ...
= ''cable'' = GBP/USD).
Exotic pairs
Alongside forex major and minor pairs are the combination of pairs known as "exotic pairs". These pairs involve a major currency - like USD, EUR, GBP, or the JPY - alongside a thinly-traded currency that holds minimal trading volume within the foreign exchange market. Such pairs include EUR/TKY, USD/SGD, USD/HKD, and GBP/SEK, to name a few. Since trading volume is less present within these pairs, there is a lack of market depth, leading to wider spreads. As a result, these pairs become high risk to trade; hence, the term "exotic pairs". The high level of risk, unique trading opportunity, and increased volatility behind exotic pairs pushes most retail traders the opposite way; however, when traded by experienced traders within season, the trading of exotic pairs offers the potential for high returns. The high volatility of these pairs is due to the pairing of a strong major currency with a more developing and unstable currency.
Cross pairs
The currency pairs that do not involve USD are called ''cross currency pairs'', such as GBP/JPY. Pairs that involve the euro are often called ''euro crosses'', such as EUR/GBP.
Trading
![ABS-5368](https://upload.wikimedia.org/wikipedia/commons/7/76/ABS-5368.0-InternationalTradeInGoodsServicesAustralia-PeriodAverageExchangeRatesUnitsForeignCurrencyPerAustralianDollar-JapaneseYen-A2716729R.svg)
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 finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the ...
. 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 than 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 , 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
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...
, 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
A bureau de change (plural bureaux de change, both ) (British English) or currency exchange (American English) is a business where people can exchange one currency for another.
Nomenclature
Although originally French, the term "bureau de chang ...
usually has spreads that are even larger.
* Example: consider EUR/USD currency pair traded at a quotation of 1.33
In the above case, someone buying 1 euro will have to pay ; conversely one selling 1 euro will receive (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.
See also
*
Currency strength
Currency strength expresses the value of currency. For economists, it is often calculated as purchasing power, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundament ...
*
Foreign exchange option
In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument that gives the right but not the obligation to exchange money denominated in one currency into another currency at ...
*
Forex signal
*
Statistical arbitrage In finance, statistical arbitrage (often abbreviated as ''Stat Arb'' or ''StatArb'') is a class of short-term financial trading strategies that employ mean reversion models involving broadly diversified portfolios of securities (hundreds to thousan ...
Notes
References
{{Reflist
Foreign exchange market