Currency pairs which are the securities traded in the FOREX market, are specifically quoted in a certain way depending on whether they are over the counter currency pairs or futures traded on regulated exchanges. There is a specific hierarchy for over the counter currency pairs, which helps determine which currency is the base currency and which currency is considered the counter currency.
A base currency is the currency that is the anchor for the currency pair. It lets the investor know the quantity of the counter currency that is needed to purchase one unit of the base currency. For example, the EUR/USD currency pair tells an investor the number of dollars needed to purchase one euro.
Currency pairs are quoted using the abbreviations for currencies which are prescribed by the International Organization for Standardization. Some of the more common ISO’s are, US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Australian dollar (AUD), and the Swiss franc (CHF).
The quoting of currencies in the over the counter market is different from the quotes an individual will receive when evaluating the futures market. Futures on currencies are liquid and the Chicago Mercantile Exchange is the global hub for currency futures. Currency futures on the CME are quoted in a style that tells the investor how many dollars are needed to purchase 1 unit of currency. For example, the Euro futures contract is priced at 1.3750, which tells the trader that they will need to pay $1.375 to purchase on euro.
Currency quotes in the over the counter market follow a hierarchy. The Euro is the top of the hierarchy, followed by the Pound and then the Australian dollar. The US dollar is next, followed by other major currencies such as the Canadian dollar, the Yen and the Swiss Franc. For example, OTC currency quotes are for the follow major pairs are quoted as follows:
EURUSD, GBPUSD, AUDUSD, USDCAD, USDJPY, USDCHF