What are currency pairs and how do they work?
Currency pairs are the exchange rate for two different currencies.
Currency pairs compare the value of one currency to another. The first currency is the base currency. This is compared with the second currency, the quote currency and indicates how much of the quote currency is needed to buy one unit of the base currency.
There are 28 major currency pairs. Every cross-border payment uses currency pairs to quote and execute trades. For example, GBP/AUD is the currency pair for British pound sterling against the Australian dollar. If GBP/AUD is trading at 1.720, then 1.720 AUD will buy one GBP.
The importance of three letters
Currency pairs are instantly recognizable by the three-letter currency codes established by the ISO standard committees in 1978. This is the official three-letter code for the representation of currencies.
Examples of the ISO currency code:
- Euro: EUR
- Britain Pound Sterling: GBP
- US dollar: USD
- Australian dollar: AUD
- Turkish Lira: TRY
- Swiss franc: CHF
- India rupee: INR
The first three letter code used to describe a currency in a currency pair is always the base currency. The second currency is called the quote currency. Currency pairs show the amount of quote currency needed to buy one unit of the base currency.
Let’s use EUR/USD as an example. A quoted price of 1.18 for this pair of means that one euro is exchanged for 1.18 US dollars. The EUR is the base currency, and the USD is the quote currency. One euro can be exchanged for 1.18 US dollars.
The major, minor and exotic currency pairs.
There are 28 currency pairs which are commonly traded, though these can fluctuate. You can see the full list of the currency pairs Currencycloud trades on its platform here.
There are seven major currency pairs. They are any pair which includes the US dollar (USD).
The seven most popular major currency pairs:
- EUR/USD: Euro / US Dollar
- GBP/USD: Great Britain Pound (sterling)/ US Dollar
- USD/JPY: US Dollar / Japanese Yen
- USD/CHF: US Dollar / Swiss Franc
- NZD/USD: New Zealand Dollar/ US Dollar
- USD/CAD: Canadian Dollar/ US Dollar
- USD/AUD: Australian Dollar/ US Dollar
These major pairs are the most liquid and widely traded in the FX market. They have the most buyers and sellers, meaning they have the tightest buy and sell spreads (the difference between the buy and sell price).
The most traded currency pairs are listed below. They represent some of the world’s largest economies and are traded in high volumes. Higher volumes tend to lead to smaller spreads.
- EUR/USD – Euro / US Dollar
- USD/JPY – US Dollar / Yen
- GBP/USD – Pound / Dollar
- USD/CHF – Dollar / Swiss Franc
Out of these, the EUR/USD is the world’s most traded currency pair. It represents the two largest economies in the world (the US economy and the European Union).
Minor currencies and minor currency pairs
Currency pairs not associated with the US dollar are called minor currencies, or crosses. The minor currencies that trade the most volume are the currency pairs in which individual currencies are also majors, for example EUR/JPY or GBP/CHF. However, they are not as liquid as the major currency pairs.
The 12 minor currency pairs are:
- EUR/GBP – Euro/British Pound
- EUR/CHF – Euro/Swiss Franc
- EUR/JPY – Euro/Japanese Yen
- GBP/JPY – British Pound/Japanese Yen
- CHF/JPY – Swiss Franc/Japanese Yen
- AUD/JPY – Australian Dollar/Japanese Yen
- CAD/JPY – Canadian Dollar/Japanese Yen
- NZD/JPY – New Zealand Dollar/Japanese Yen
- AUD/NZD – Australian Dollar/New Zealand Dollar
- AUD/CHF – Australian Dollar/Swiss Franc
- GBP/CHF – British Pound/Swiss Franc
- CAD/CHF – Canadian Dollar/Swiss Franc
Exotic currencies and exotic currency pairs
The exotic currency pairs include currencies of the emerging markets. These are not as liquid as the major or minor currencies, and their spreads are much wider. Foreign exchange of exotic pairs consists of one major currency like the USD, JPY, EUR or GBP traded against another currency of a lower volume (the exotic) for example USD/TRY (US dollar/ Turkish Lira). Like the major currencies, the exotic pairs have a base and a quote currency.
Examples of exotic currency pairs
- EUR/TRY – Euro/Turkish Lira
- USD/TRY – US Dollar/Turkish Lira
- USD/MXN – US Dollar/Mexican Peso
- USD/ZAR – US Dollar/South African Rand
- USD/HKD – US Dollar/Hong Kong Dollar
- USD/SGD – US Dollar/Singapore Dollar
- USD/THB – US Dollar/Thai Baht
- USD/SEK – US Dollar/Swedish Krona
- USD/DKK – US Dollar/Danish Krone
What affects the rates of major currency pairs?
Changes in overnight interest rates by central banks, information about a nation’s economy and politics can affect currency pairs.
Interest Rates When a central bank increases its overnight interest rate it can cause increased demand for that currency. This is because investors and traders seek the higher yield which in turn appreciates the currency compared to other currencies.
Economic Data Reports (economic releases) give traders a glimpse into the performance of a nation’s economy. Data in these reports which can influence currency rates include: inflation data, employment data, gross domestic product, retail sales, and purchasing managers index.
Take the Australian dollar (AUD) for example. For example, the rate of the AUD/USD is often impacted by mining commodities, and farming. The AUD also does well when China’s economy is strong because the two countries are big trading partners.
Politics, Elections, corruption scandals and changes in policies can cause instability, which is reflected in the FX market.
Currency pairs and cross currency triangulation
Converting one currency to another by a third intermediary currency is called currency triangulation. For example: EUR – > MXN could be EUR – > USD – > MXN. For more examples see Currencycloud’s currency triangulation listing here.
Holidays can affect the timelines for multi-step conversions. For example, if a currency pair is triangulated against USD and the conversion lands on a US holiday, the timeline will shift forward by one day (the next available business working day).
Be aware of FX cut off times. When converting currencies, it’s important to know the cut off times of different currencies. As long as you create your conversion before the cut off time, the conversions will settle on the same day. Currencycloud’s FX schedules have all you need to know to make your conversion on time.
Converting payments
Currencycloud’s currency converter API enables users to integrate exchange rates. The converter provides 24/7 access to currency exchange rates, enabling users to manage and monetize FX with competitive currency exchange rates across hundreds of currency pairs.
