Currencies, Price and Spread

 

Currencies and Currency Pairs

Now let’s take a look at how foreign currencies are quoted and priced. Currencies are designated by three-letter symbols. The standard symbols for some of the most commonly traded currencies (also known as Major currencies) are shown below:

 

Symbol Country Currency Nickname
USD United States Dollar Buck
EUR European Union Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

 

Through the example in previous lesson, you known that currencies are traded in pairs since you buy one currency while selling another. Therefore, currencies also are quoted in pairs because value of a currency must be reflected by an amount of another currency. For instance, the pair of U.S Dollar and Euro is written by EUR/USD or sometime EURUSD. The first currency of a currency pair is called the base currency, and the second currency is called the quote currency.

 

EUR/USD

Base currency/Quote currency

 

The major pairs are the most frequently traded pairs that contain the U.S dollar (USD), which listed below:

 

Symbol Pair
EUR/USD European Union Euro/ U.S Dollar
USD/JPY U.S Dollar/ Japanese Yen
GBP/USD Brittish Pound/ U.S Dollar
USD/CHF U.S Dollar/ Swiss Franc
USD/CAD U.S Dollar/ Canadian Dollar
AUD/USD Australian Dollar/ U.S Dollar
NZD/USD New Zealand Dollar/ U.S Dollar
 

The major-cross pairs are the most actively traded pairs that contain the major currencies, except U.S dollar, such as EUR/JPY, EUR/GBP, CAD/CHF, etc.,.

 

In additional, there are less liquid pairs that contain currency of other countries, such as USD/HKD, USD/SGD/, USD/ZAR, etc.,. which also called "Exotic Pairs".

 

You may ask: "Are inverted pairs like USD/EUR, JPY/USD, etc., valid?". The answer is "Nope". There is only one valid pair for each two currencies in forex market. This is the rule of market or the heritage of history and you have to follow.

 

Price

By using quotation, the value of a currency is determined by its comparison to another currency. The price of a pair (exchange rate) is the amount of the quote currency required to purchase one unit of the base currency.

 

                     EUR/USD      =     1.3640

      which means    1 EUR      =     1.3640 USD

 

But quoted price in forex is a bit more complex. Let's say that you are at the airport and you want to exchange some of your local currency to the foreign currency of the country you are going to arrive. You go to exchange spot and you will see that there are two prices are quoted: one is the price you buy the foreign currency and one is the price you sell it. The same is applies to forex market, where currency pairs are quoted by two price: Bid price and Ask price. The first part of the quote is the Bid price, which is the price that you can sell the base currency to the market (or the market willing to buy from you). The second part of the quote is the Ask price, which is the price that you can buy the base currency from the market (or the market willing to sell to you).

 

                     EUR/USD      =     1.3640/1.3642

             Base currency/Quote currency                         Bid price/Ask price

                                                                               Your selling price/Your buying price

 

The quote above can be translated as: "If you want to sell 1 EUR to the market, you will receive 1.3640 USD. If you want to buy 1 EUR from the market, you have to spend 1.3642 USD". Sometime, the currency pairs are quoted by another shorten form:

 

                     EUR/USD      =     1.3640/42

 

Formerly, currencies are quoted base on "4 and 2" decimal standard. This mean the price has 4 or 2 digits after the decimal comma (4 for the most currencies and 2 for Janpanese Yen). Recently, more and more forex brokers quote currency pairs by "5 and 3" decimal standard, which is more fractional (or more precisive) than the "4 and 2". The currency quote may looks like this:

 

                          EUR/USD      =     1.36407/1.36428

 

Spread

You see that the bid price is always lower than the ask price. The difference between bid price and ask price is called "Spread". Forex brokers, like many other business, earn their money by making the spread (dealing desk brokers) or charge a commisson per client's trade (no-dealing desk brokers). That's why in the previous lesson we said that you will still lose if you buy and sell a currency at the same time.

bid ask spread

In additional, the spread between the bid and ask price reflects the level of liquidity in a currency pair. You will see some currency pairs, especially major pairs, have the spread smaller (some brokers like to call it "tighter") because these pairs are more liquid than the others. In other words, these pairs are being traded much more than the others.