When undertaking forex trading, it is essential for a trader to first understand currency
pairs. A currency pair is the method for quoting foreign currencies in comparison to each
other. In other words, currency pairs denote the relative value of one currency against
The quote currency is the currency that is used as a reference to the base currency. The quote currency is also known as counter currency, and the base currency can also be referred to as the transaction currency.
Currency pairs are quoted using the currencies standard abbreviations, with the base first and the quote second. For example, a currency pair having a base currency of the Australian dollar and a counter currency of the United States dollar would be quoted as follows: AUD/USD
This quote tells us that one Australian dollar can be exchanged for 1.0350 USD. If the quote changes from AUD/USD 1.0350 to AUD/USD 1.0360, the Australian dollar has increased in relative value by 10 pips. This increase can be attributed to a weaker purchasing power for the USD or a stronger purchasing power for the AUD, or both. Standard currency abbreviations are determined by the International Organisation for Standardization (ISO).
Some define minor currency pairs and crosses similarly, but the minors have historically included USD-based pairs that weren´t part of the top three or four traded currencies. For example, USD/JPY is a major pair, but HKD/USD is not.
Currency pairs that do not involve the USD are known as cross rates, or crosses. AUD/NZD is the Australian dollar/New Zealand dollar cross, for instance. Euro crosses describe currency pairs that trade against the Euro, but which would normally partner up with the U.S. dollar. For example, EUR/JPY, EUR/GBP or EUR/AUD.
This refers to currency pairs involving an emerging market currency - e.g., Philippines or Mexico - which is not highly liquid (they tend to have a wide bid/offer spread and usually deal in smaller sizes).
This is a currency whose underlying economy is linked to the importance of resources or agriculture. It can be a developed or an emerging economy - e.g., Australian dollar, Canadian dollar, New Zealand dollar or Brazilian real.
In times of financial market stress, some currencies are bought because they are viewed as a calm port in a storm. The USD and Swiss franc have historically been the currencies that filled this role.