Forex Currency Pairs – Chapter 5 | Learn Forex

Pairs mean two things together. In foreign exchange, each currency’s relative value with another foreign currency gets displayed on board for basic currency conversion.

For example EURUSD, euro vs dollar. Here US Dollar is the quote currency and Euro is the base currency.

If EURUSD quotes 1.2500 means, for each 1 euro you will earn $1.25 by converting from euro to dollar. For all currency pairs, 1st currency is the base currency and 2nd currency is the quote currency.

In the case of USDJPY, the base currency is the US dollar (USD) & quote currency is the Japanese Yen (JPY).

If USDJPY gets quotes as 112.00 that means for every $1 you will earn 112.00 Yen. In currency pair quote abbreviation, USDJPY and USD/JPY are the same. “/” (slash) here indicates “vs”.

Relative value:

The relative value of a currency is above stated. Like if EURUSD is quoting 1.25, that means the Eurodollar relative value is 1.25 compared to the US dollar. Most of the trader all of the world uses the relative value of a foreign currency.

Absolute value:

The term absolute means an independent value of a currency without any relation to other currencies. In a practical approach, it is a bit difficult to find the absolute value of a currency without comparing it with other currencies. But financial institutions have a separate algorithm to calculate currency index which replicates absolute value. For example, USD index, EUR index, etc.

Different currency pairs

There are a total of 180 currencies available in this world for 195 countries. So with 180 foreign currencies, there can be thousand and more currency pairs combinations possible. But not currencies get trades over the counter. Thus based on their daily trading volume & popularity, these currency pairs can be categorized into 3 sections as explained below:

Major currency pairs

Top major currencies of the world are Eurodollar, US dollar, Pound sterling, Japanese Yen, Australian dollar, Canadian dollar, New Zealand dollar, Swiss franc. They are major because they are highly traded among forex traders, thus having high liquidity.

Cross currency pairs:

Cross-currency pairs are the minor currency pairs that get traded less than the major currency pairs. Thus it has higher spreads than the major currency pairs due to lower liquidity.

Exotic currency pairs:

Exotic currency pairs are made with major currencies from emerging country’s currencies. Mostly the developed countries other than the popular one. These currency pairs have the lowest number of transactions among traders. Thus it has the highest spread due to lack of liquidity.

With the MetaTrader trading software screenshot above, look at the spreads for exotic pairs, it’s usually higher than the major pairs & minor cross currency pairs.

Currency Pair Basket:

With 8 major currencies, there can be 28 currency pairs combination possible including major pairs & cross minor pairs which get traded mostly among forex traders. These 28 currency pairs combinations also get widely traded in basket trading strategies with currency correlation & hedging. (explained in chapter 12)