Currency Rate Quotations
A number of factors come into play, determining the currency rate exchange, all depending on the trading relationship between the two countries in question. Let us take a look at the currency rate quotations online, which is the prime focus of this page.
An online currency rate quotation is given by stating the number of units of "quote currency", (price currency, payment currency) that can be exchanged for one unit of "base currency" (unit currency, transaction currency). For example, in a currency quotation which says the EURUSD exchange rate is 1.4325, that is, 1.4325 USD per EUR, also known as EUR/USD; the quote currency is USD and the base currency is EUR.
It is the market convention determining the base currency and the term currency. Most parts of the world will come across this order: EUR – GBP – AUD – NZD – USD – others. For instance, if you would like to convert from EUR into NZD, EUR is the base currency and NZD is the term currency. The currency rate exchange will tell you how many New Zealand dollars you would pay or receive for 1 euro. In some parts of Europe and the non-professional market in the UK, EUR and GBP are reversed. The GBP is quoted as the base currency to the euro. Cyprus and Malta which were earlier quoted as the base to the USD, when they joined the euro, were recently removed from this list.
Getting on with the topic of online currency rate quotations, you will come across currency quotations, where both currencies are not listed. Then, in order to determine which the base currency is, the market follows the convention to use the base currency which gives a currency exchange rate greater than 1.000. This avoids rounding issues for exchange rates being quoted to more than 4 decimal places. However, there are some exceptions to this rule. For example, the Japanese often use their currency as the base to other currencies in the currency rate exchange quotations.
Currency quotes, where the country's home currency is used as the price currency are known as direct quotation or price quotation. These are used by most countries. But quotes using a country's home currency as the unit currency are known as indirect quotation or quantity quotation. These are common in UK, Australia, New Zealand and the Euro zone.
When using direct currency rate quotation, if the home currency is strengthening then the exchange rate number tends to decrease, and conversely if the foreign currency is strengthening and the home currency is depreciating, the exchange rate number increases.
From the early 1980s to 2006, the market convention followed was that most currency pairs were quoted to 4 decimal places for spot transactions and up to 6 decimal places for forward outright or swaps. The fourth decimal place is usually referred to as a "pip". In 2005 Barclays Capital broke this convention by offering spot exchange rates with 5 or 6 decimal places on their electronic dealing platform. The contraction of spreads arguably necessitated finer pricing and gave the banks the ability to try and win transaction on multibank trading platforms. A number of other banks have now followed this.