A currency pair is a quote of two different currencies, in which the value of one currency is quoted against another. The first listed currency of the currency pair is the base currency. The second currency is the quote currency.
Currency pairs compare the value of one currency to another — the base currency (or first one) versus the quote currency (or second one). People use it to understand how much bid currency is required to buy one unit of the base currency. The currencies are identified by an ISO currency code, or three-letter alphabet code. This is what they are associated with on the international market. For example, for US dollars the ISO code will be USD.
Basics of currency pairs
The trading of currency pairs is conducted in the foreign exchange market. It is the most liquid and biggest market in the financial world. This market allows for the purchase, sale, exchange and speculation of currencies. It also enables the conversion of currencies for international trade and investment. The Forex market is open 24 hours a day, five days a week (excluding holidays) and sees massive trading volumes.
All foreign exchange trades involve the simultaneous purchase of one currency and the sale of another. However, those involved consider the currency pair a unit. In other words, it is an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and sell the quoted currency. Bid (purchase price) shows how much bid currency you need to get a unit of the base currency.
Conversely, when you sell a currency pair, you sell the base currency and get the quote currency. Asking for a currency pair (sell price) shows how much you will get in the bid currency to sell one unit of the base currency.
Unlike stocks or commodity markets, you trade currencies. Therefore, this means that you are selling one currency to buy another. For stocks and commodities, you are using cash to buy one ounce of gold or one share of Apple stock. Economic data related to currency pairs — GDP, interest rates, major economic announcements — influence the prices of a business pair.
Major currency pairs
A major currency pair is the euro against the US dollar. This is otherwise known as EUR/USD. In fact, it is the most liquid currency pair in the world. This is because it is the heaviest business. The quote EUR/USD = 1.2500 means that one euro is exchanged for 1.2500 US dollars. In this case, USD is the quote currency whereas EUR is the base currency. Therefore, 1 euro can be exchanged for US $1.25. Another way of looking at it is that it will cost you $125 to buy EUR 100.
There are many currency pairs in the world. The total number of currency pairs changes as the currencies come and go. All currency pairs are classified according to the volume traded for a pair on a daily basis. The currencies that trade the most volume against the US dollar are referred to as major currencies. These include EUR/ USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD. The last two currency pairs are known as commodity currencies. That is because both Canada and Australia are rich in commodities. Therefore, both countries are affected by their prices.
All major currency pairs have very liquid markets that trade 24 hours every day. They also hey have very narrow spreads.
Minor and foreign couples
Currency pairs that are not linked to the US dollar are minor currencies or crosses. These pairs are spread wide and are not liquid as the major ones. However, they are still sufficiently liquid markets. The highest volume crosses are between currency pairs, with the individual currencies being even larger. Some examples of crosses include EUR/GBP, GBP/JPY, and EUR/CHF.
Foreign currency pairs include emerging market currencies. These pairs are not as liquid, and the spread is more widespread. An example of a foreign currency pair is USD/SGD (US Dollar/Singapore Dollar).