Probably one of the most common terms you will encounter when it comes to fx, and one that you will often refer to, is the currency pair. Understanding how it works, thus, should be one of the first few things that you should do if you are new to investing in the foreign exchange market.
In this article, we will introduce you to currency pairs, including how they work and what their significance is to the market.
What is a Currency Pair?
As the name would suggest, a currency pair is a set of two currencies paired against each other. When displayed as a quote, it simply shows the value of one currency relative to the value of another. So for example, a currency pair of AUD/USD 1.014 shows the relative value of the Australian dollar to the US dollar. What it tells us is that 1 AUD can buy us 1.014 USD.
Reading a Currency Pair
Currencies are read in their ISO 4217 codes—USD for the US dollar, for example, and AUD for the Australian dollar. Meanwhile, currencies that are most traded globally are called majors, which include the USD, AUD, Japanese Yen (JPY), euro (EUR), British pound sterling (GBP), Canadian dollar (CAD), and the Swiss franc (CHF). The majors comprise about 75% of all the currencies being traded in the forex market.
Let’s go back to the earlier figures…
AUD/USD 1.014
The currency on the left is called the base currency, while the right of the pair is called the quote currency or the counter currency, which is the one being used as reference.
As with other forms of trade, a currency pair is subject to fluctuations. So if the AUD/USD currency pair goes from 1.014 to 1.017, it could be read as the AUD increasing in its value over the USD due to the strengthening of the AUD or weakening of the USD, or both.
While it has weakened due to the recent economic crisis, the USD remains as the standard unit of currency in international trade. Because of that, most major currencies are paired against the USD. Meanwhile, currency pairs that do not involve the USD are called cross currency pairs or cross rates. Most common of these cross rates include EUR/GBP, EUR/JPY, and AUD/JPY.
There you have it, our brief introduction on currency pairs. We hope that what we have written above will help you gain better understanding of one of the most common concepts in forex trading. For more tips, be sure to check out our Fundamental Articles section. Until next time!
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