Understanding FX Quote Conventions
Identifying Currencies
Ever wonder what it means when you see currency quotations like these?
EUR/USD
Currencies are quoted in relation to another currency. For example, when we refer to the exchange rate of the euro (the currency of the European Union) to the U.S. dollar we quote the relationship, or exchange rate, as EUR/USD.
The first currency in the quotation – in this case the euro – is represented by its three-letter symbol, EUR. This is known as the named or base currency.
The second currency – in this case the U.S. dollar, shown by its three-letter symbol, USD – is known as the terms or quote currency.
Currency Pairs
When trading FX, the trading action is applied to the base, or first, currency in the currency pair. So, if you purchase the EUR/USD at 1.1250, you would receive one unit of the euro (EUR) in exchange for a payment of 1.1250 U.S. dollars (USD).
American and European Terms
Currency pairs versus U.S. dollars tend to be quoted in one of two ways; in either American or European terms.
European terms do not limit or refer to just Europe-based currencies, but to any currency other than the USD. European terms mean the U.S. dollar sits in the base currency location and the other currency occupies the terms position.
For example, the Swiss franc trades in the spot market in European terms. It is quoted in USD/CHF convention. CHF is the three-letter symbol for the Swiss franc.
American terms are currency pairs where the quote convention places the USD in the terms location.
For example, the British pound trades in American terms in the futures market and is shown as GBP/USD. GBP is the three-letter symbol for the British pound.
It’s important for traders to understand that the quote convention for futures may be different than the spot for the currency pairs they wish to trade.
Trading Codes
On futures execution platforms, all currency futures will be listed using a trading code that includes the instrument, month and year.
For example, when trading euro FX futures on CME Globex, the contract code for March 2017 would be 6EH7; 6E is the product code, H is the month code and 7 is the year.
Summary
Traders looking to express an opinion in the FX futures market need to be aware of the quoting convention and the trading code symbols for each currency pair offered by the exchange.