Quoting currencies

Because currencies are quoted in a different manner than equities, reading a foreign exchange quote may seem a bit confusing at first. However, it’s really quite simple if you remember two things: 1) The first currency listed is the “base currency” and 2) the value of the base currency is always 1.

For example, a quote of 1.3303 in the U.S. dollar/Canadian dollar currency pair (USD/CAD) means 1 U.S. dollar is equal to 1.3303 Canadian dollars. Likewise, U.S. dollar/Swiss franc (USD/CHF) 1.2759 means 1 U.S. dollar equals 1.2759 Swiss francs.

In every currency pair involving the U.S. dollar, the dollar will be the base currency, with three exceptions — the British pound (GBP), the Australian dollar (AUS) and the European currency unit, or euro (EUR). In these cases, a quote such as EUR/USD 1.2050, means that 1 euro equals 1.2050 U.S. dollars. Whenever the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/CAD quote we previously mentioned increases to 1.3313, the dollar is stronger because it will now buy more Canadian dollars than before.

However, in the three instances where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, Australian dollar or euro.

In short, if a currency-pair quote goes higher, the value of the base currency increases. A declining quote means the base currency is weakening.

Trades not involving the U.S. dollar are called (in the U.S.) “cross rates,” but the premise is the same. A quote of GBP/CHF 2.3257 signifies the British pound is the base currency and 1 pound is equal to 2.3257 Swiss francs.

Each trade in a currency pair represents two simultaneous positions, so if you are long the base currency, the second, or counter currency is effectively sold short, because you are expecting the base currency to rise as the other falls.

The same logic applies to short positions: shorting the base currency means you’re going long the counter currency.