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.
[edit] Syntax and quotation
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).
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.
[edit] 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 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.
[edit] 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%,
[citation needed] and therefore they exhibit high
market liquidity.
The Majors are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD.
[1] Sometimes, the New Zealand Dollar/USD pairing is also considered to belong to this group.
[edit] 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, 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.
[2]. 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.
[edit] 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.
[edit] 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. 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.[
