Understanding a Currency Pair

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Forex trading is essentially the buying of one currency and the simultaneous selling of another. Therefore when trading currencies we will always see them quoted in pairs.

Currency Pairs Hierarchy

Currency quotes , unlike other goods and services, happen in terms of their value versus another – each currency is valued against another and this activity is called “currency pairing”.

Example, when one asks what the USD is worth, you would tend to ask “against which currency”? Lets say one said INR (Indian Rupee) and then is when the pair quote is complete- for instance by responding “1 USD = 69 INR”. This is called the currency exchange rate is the value of a certain world currency with respect to another currency

The first currency in the pair is always called the “base currency” and the second is the “quote currency or term currency.”

The base currency is the one that is quoted first in a currency pair. Using EURUSD as an example, the Euro would be the base currency. Similarly, the base currency of GBPUSD is the British pound (GBP). This implies that whatever quote you give will always be versus 1 unit of the base currency.

The quote currency is the one that comes second in a pairing. For both the EURUSD and the GBPUSD, the US dollar is the quote currency.

In our example above, if the Euro (base currency) were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal.

In the USDINR, if the USD (base currency) were to strengthen, the USDINR would rise and conversely, if the Rupee were to strengthen , the pair would move down. Therefore, unlike stocks, when the INR falls you would usually see a green arrow indicating the depreciated rupee (or actually, an increased USD)!

Why this convention?

Base currency and cross-currency no longer have anything to do with the relative strength of the two currencies involved (although, originally, before the introduction of the euro, that was generally the case).

Rather, by generally agreed upon rules, there is a “heirarchy” of currencies, which is never altered, even as various currencies gain or lose strength relative to other currencies.

You may have noticed that the euro is always the base currency in every euro-pairing, and the yen is always the cross-currency in every yen-pairing, etc. 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:

Euro> Pound Sterling> Australian Dollar > New Zealand Dollar > United States Dollar > Canadian dollar >
Swiss Franc >Japanese Yen

When a currency quote is given without the Indian Rupee as one of its components, this is called a cross currency, i.e. when home currency is not involved in the currency pair. The most common cross currency pairs are the USD/EUR, EUR/GBP, GBP/JPY, etc.

Nicknames of currency pairs!

EUR/USD – “Fiber”

USD/JPY – “Yen”

GBP/USD – “The cable”. This nickname has its origins in the time when a cable under the Atlantic Ocean helped synchronize the GBP/USD quote

AUD/USD – “Aussie”

USD/CAD – “Loonie”. This nickname comes from the bird on the Canadian coin

USD/CHF – “Swissy”

 

A Little Known fact!

Nearly 700 years before Sweden issued the first European banknotes in 1661, China released the first generally circulating currency. In fact, usage of paper notes dates backs even earlier, to the 7th century Tang Dynasty. For centuries copper coins had been China’s primary currency. In order to carry large amounts of cash, people hefted around an ever-increasing number of these coins–not the easiest, or safest, thing to do over long distances. In an attempt to lighten their load, merchants began to deposit these coins with each other and were issued paper certificates for the coin’s value. The paper was certainly lighter. So light, in fact, that it is believed to have earned the nickname “flying money,” for its tendency to blow away in a stiff wind. The use of paper money remained in place for the next 200 years, until a copper shortage and inflation from overproduction of the bills forced merchants and Song Dynasty government officials alike to issue and accept paper notes backed by gold reserves—the first legal tender in the world. (Source: https://www.history.com/news/8-things-you-may-not-know-about-money)

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