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Foreign Exchange

How to Read Currency Exchange Rates

The value of a currency is determined by its comparison to another currency. The first currency of a currency pair, the one to the left, is called the "base currency", and the second currency, on the right, is called the "terms currency" (or "quote currency"). The currency pair indicates how much of the terms currency (right side) is needed to purchase one unit of the base currency (left side).

Foreign exchange market convention is such that most currencies, like the Canadian dollar, are quoted directly against the US dollar. This is known as the “direct quote” or “per-dollar” quote. For example, Canadian dollars are typically quoted “per-dollar” as USDCAD. This means that the rate will indicate the amount of Canadian dollars required to buy or sell one US dollar. Other currencies commonly quoted “per-dollar” include USDJPY (Japanese yen), USDCHF (Swiss franc), and USDMXN (Mexican peso).

If you want to see the rate in terms of how much USD is required to buy one Canadian dollar, you must find the “in-dollar” rate, or CAD rate in this example. In-dollar rates, the inverse of per-dollar rates, are shown with the USD listed second or to the right (i.e. CADUSD). Currencies commonly quoted in-dollar include GBPUSD (British pound), EURUSD (Euro), AUDUSD (Australian dollar), and NZDUSD (New Zealand dollar).

There is no particular reason why a currency is quoted in-dollar or per-dollar, it is a standard market convention that has evolved over time.

EXAMPLE

A US company needs to pay 50,000 Canadian dollars to its supplier in Canada today.

The “per-dollar” rate for USDCAD is 1.40

This means that it will cost (not including margins) 1.40 Canadian dollars for each US dollar that they need to purchase today.

50,000 / 1.40 = $35,714

So 50,000 Canadian dollars will cost the company $35,714 US dollars today.

If the rate was quoted “in-dollar” (CADUSD), the rate would be 0.71428

This means that it will cost (not including margins) 0.71428 US dollars for each Canadian dollar they need to purchase today.

50,000 * 0.71428 = $35,714

So 50,000 Canadian dollars will cost the company $35,714 US dollars today.

Foreign Exchange 

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