Currencies quoted

Abbreviations for currencies
Nicknames of currencies
How currency prices are quoted
Base currency and quote currency
Bid and offer in terms of base currency & quote currency
How professionals talk about a trade
Spreads

If you’re going to trade currencies, you’ll have to know the market conventions for how they’re quoted. You don’t want to accidentally buy when you think you’re selling!

ABBREVIATION FOR CURRENCIES

Each currency has a three-letter abbreviation. The abbreviations of the most commonly traded currencies are as follows:

US dollar: USD

Euro: EUR

Japanese yen: JPY

Great British pound: GBP

Swiss Franc: CHF

As you may notice, the first two letters are usually the official two-letter abbreviation for the country – US, JP, GB, etc. -- while the third letter usually refers to the name of the currency: dollar, yen, pound, etc. For the Swiss franc, CH stands for Confoederatio Helvetica, the Latin name of the country. The euro is an exception, since it’s the currency of several countries.

Just FYI, the abbreviations for currencies are determined by the International Organization for Standardization (ISO) in standard ISO 4217.

NICKNAMES OF CURRENCIES

Some currencies have nicknames that are widely used in the market. GBP/USD is commonly called cable, from the days when the rate was transmitted by undersea cable every day from New York to London. People would ask, “What’s the cable today?” and the name stuck. The Canadian dollar is often referred to as the loonie, from the common loon, the bird that appears on the country’s 1-dollar coin. NZD is known as the Kiwi, after that country’s iconic bird. And the US dollar is known as the greenback, for obvious reasons. (Why it’s called the buck is an open question as far as I know.)

The Swiss franc is often referred to just as Swissie, while the Norwegian krone, or NOK, is referred to as Nokkie.

The retail forex market has tried to popularize the term fiber for EUR/USD, based on the internet’s fiber optical network that’s replaced the cable that once transmitted the GBP/USD rate. However this term has never taken hold among professionals.

The most actively traded currencies are those of the major industrial countries: USD, EUR, JPY, GBP, AUD, CAD, CHF. Together with NZD, NOK, and SEK, these are called the major currencies or the “majors,” or sometimes the “G-10 currencies.” They generally have the narrowest spreads and the most activity. Seventy-four percent of all trading is in just the top four of them (USD, EUR, JPY, and GBP).

Other currencies are referred to as exotic currencies. This has nothing to do with how exotic the location of their country is.

Note that while trading in the Chinese yuan (CNY), Hong Kong dollar (HKD), Singapore dollar (SGD), and Korean won (KRW) is relatively active, this largely reflects trading in their home market and not retail trading abroad. You may be able to get a quote in these currencies but the spreads are likely to be wide. In any event HKD is pegged to USD and so there’s little point in speculating in it.

HOW CURRENCY PRICES ARE QUOTED

When you see currencies quoted on your screen, you’ll always see two prices: the bid and the ask.

In finance, the bid price is the price to buy something, while the ask, or offer, price is the selling price. Think of it as bidding on something at an auction – this is the price the person is willing to pay. Or offering to sell something, or how much are you asking for your house?

It’s important to note that this terminology is from the market-maker’s point of view, not yours. The bid is the price at which the market-maker – in this case, your broker -- is willing to buy, while the offer is the price at which the market-maker is willing to sell. The distinction is really important, because it’s the opposite from your point of view. That is you, the client, sell at the bid and buy at the offer. As we say in the market, you hit the bid or pay the offer.

The market convention is to put the bid on the left-hand side and the offer on the right. The bid is always lower than the offer, because that’s how market-makers make their money: through the spread (the difference between the price that they buy at and the price that they sell at).

Let’s think of it in terms of stocks. If for example a stock is trading at $100-$101, it means a market-maker is bidding for the stock (will buy your shares from you) for $100 a share, while the market maker is offering to sell you the stock at $101 a share, or asking $101 for one share. So if the bid for that stock is $100, that’s the price you can sell at, and if the offer is $101, that’s the price you can buy at.

It’s more confusing in the FX market because in FX, you’re simultaneously buying one currency and selling another, rather than using a currency to buy something else. So a bid for one currency is automatically an offer for another currency.

BASE CURRENCY AND QUOTE CURRENCY

The currency pair is made up of a base currency and a quote currency. The base currency is usually (but not always) the larger of the two units. Normally it’s the US dollar, except in case of the euro and those currencies associated with Britain and the Commonwealth: the pound and the Australian and New Zealand dollars. (The Canadian dollar used to be quoted that way as well, but the market convention changed.) Currency pairs that don’t involve the dollar, such as AUD/NZD, are usually called cross rates.

When writing the name of the currency pair, the base currency is the one on the left-hand side and the quote currency is the one on the right-hand side (such as USD/JPY or EUR/USD). The pair name represents how much of the quote currency, the one on the right, you have to sell to buy one unit of the base currency, the one on the left. Or looked at the other way, the value of the pair is quoted in the quote currency (which is why it’s called the quote currency in the first place). For example, with USD/JPY, USD is the base currency and JPY is the quote currency. If USD/JPY is trading at 110.00, then you have to pay 110 yen to get $1. With EUR/USD, the euro is the base currency and the dollar is the quote currency. If EUR/USD is at 1.1000, then you have to pay $1.10 to get €1.00.

In short, you buy or sell the base currency using the quote currency for the payment. Your trade is denominated in the quote currency. Just like you might say that a dozen eggs costs a certain amount of euros, you would say that one euro costs a certain amount of dollars, or one dollar costs a certain amount of yen. The base currency is the “eggs” and the quote currency is what you use to pay for it.

This way of quoting currencies can seem counter-intuitive because the slash mark (/) between the two names seems to signify division, as in “dollars per yen” or “euros per dollar.” In that case, one would have to quote JPY/USD or USD/EUR. And in fact some academics do refer to currency pairs in this fashion, but it isn’t the market convention. To avoid this confusion, some authors use a dash instead of a slash mark (USD-JPY) and some use nothing (USDJPY).

BID AND OFFER IN TERMS OF BASE CURRENCY AND QUOTE CURRENCY

We discussed bid and ask prices earlier. To put it in the terms we now know, the bid is the price at which a market-maker is bidding to buy one unit of the base currency. The price is quoted in terms of the quote currency -- which is why it’s called the quote currency. The offer is the price at which the market-maker offers to sell one unit of the base currency (again, in terms of the quote currency).

From the client’s point of view of course it’s the opposite: the bid is how many units of the quote currency you will get in return for selling one unit of the base currency, while the offer is the number of units of the quote currency you will have to pay in order to buy one unit of the base currency.

SPREADS

The spread is the difference between the bid price, the price the market maker will buy at, and the ask, or offer, price, the price the market maker is selling at. The spread is the profit margin of brokers.

Spreads are narrower in more commonly traded currency pairs, such as EUR/USD, than in less widely traded pairs, such as emerging market currencies. Spreads can and do change frequently. They widen when markets are volatile and narrow when markets are calm. That’s because there’s more of a risk that the market-maker could lose money on the trade when the markets are volatile and so he demands to be compensated for that increased risk.

Moreover, some currency pairs (such as AUD/NZD) will have narrower spreads during the Asian day, while others (such as USD/CAD) will have narrower spreads during the US day. This reflects increased activity and therefore increased liquidity in the pair.

The spread between the two prices is how the market-maker makes money. As in any market, the trader buys low and sells high and makes money that way.

HOW PROFESSIONALS TALK ABOUT A TRADE

Many people talk about “buying euros” or “selling yen.” It’s usually assumed that the dollar is the other currency that they’re buying or selling against.

But this isn’t the way that professionals in the market talk. I learned that shortly after I switched from being a bond analyst to being an FX strategist and mentioned something to a salesman about “buying yen.” He took me aside and said, “Marshall…we like clients who say “buying yen.” The implication was that these weren’t particularly sophisticated clients and that the salesman would find it easy to take advantage of them.

Professionals in the currency market usually talk in terms of buying or selling a currency pair, not just the quote currency. For the two examples above, a professional would talk about buying or selling EUR/USD (euro-dollar) and buying or selling USD/JPY (dollar-yen). This might be abbreviated to buying or selling the base currency but not the quote currency, especially in cases where the quote currency is the dollar! So for example while professionals might talk about “buying euros” when they are buying EUR/USD, since selling dollars is understood, they don’t talk about “buying yen” or “selling yen;” they talk about “selling USD/JPY” or “buying USD/JPY,” respectively.

SUMMARY

We’ve discussed in this article how people in the market quote currencies. Each currency has a three-letter abbreviation. Currency trades are always quoted in pairs, with the name of the base currency – usually the larger of the two – coming first and the quote currency coming second. The pair is quoted in terms of how many units of the quote currency it takes to buy one unit of the base currency. Professionals usually talk in terms of buying and selling the currency pair, not just the quote currency. When you see a currency pair quoted, usually there are two prices given: a rate to buy the base currency and a rate to sell the base currency. The difference between the two, or the spread, is how the market maker makes a living.