What Is a Quote Currency?
In foreign exchange (forex), the quote currency, commonly known as the counter currency, is the second currency in both a direct and indirect currency pair and is used to determine the value of the base currency.
In a direct quote, the quote currency is the foreign currency, while in an indirect quote, the quote currency is the domestic currency. The quote currency is listed after the base currency in the pair when currency exchange rates are quoted. One can determine how much of the quote currency they need to sell in order to purchase one unit of the first or base currency.
- The quote currency (counter currency) is the second currency in both a direct and indirect currency pair and is used to value the base currency.
- Currency quotes show many units of the quote currency they will need to exchange for one unit of the first (base) currency.
- In a direct quote, the quote currency is the foreign currency, while in an indirect quote, the quote currency is the domestic currency.
- When somebody buys (goes long) a currency pair, they sell the counter currency; if they short a currency pair, they would buy the counter currency.
Understanding Quote Currency
Understanding the quotation and pricing structure of currencies is essential for anyone wanting to trade currencies in the forex market. Market makers tend to trade specific currency pairs in set ways, either direct or indirect, which means understanding the quote currency is paramount.
A currency pair's exchange rate reflects how much of the quote currency is needed to be sold/bought to buy/sell one unit of the base currency. As the rate in a currency pair increases, the value of the quote currency is falling, whether the pair is direct or indirect.
For example, the cross rate between the U.S. dollar and the Canadian dollar is denoted as USD/CAD and is a direct quote. This means that the CAD is the quote currency, while the USD is the base currency. The CAD is used as a reference to determine the value of one USD. From a U.S.-centric point of view, the CAD is the foreign currency.
On the other hand, the EUR/USD denotes the cross rate between the euro and the U.S. dollar and is an indirect quote. This means that the EUR is the base currency and the USD is the quote currency. Here, the USD is the domestic currency and determines the value of one EUR.
Currency pairs—both base and quote currencies—are affected by a number of different factors. Some of these include economic activity, the monetary and fiscal policy enacted by central banks, and interest rates.
Major currencies, such as the euro and U.S. dollar, are more likely to be the base currency rather than the quote currency in a currency pair, especially when it comes to trades in exotic currencies.
The most commonly traded currency pairs on the market in 2021 were:
As noted above, the first currency in these pairings is the base currency while the second one (after the slash) is the quote currency. In the GBP/USD pairing, the pound is the base currency or the one that is being purchased while the dollar is the quote currency. This is the one that is being sold.
Example of a Quote Currency
Let's assume a trader wants to purchase £400 using U.S. dollars. This would involve a trade using the GBP/USD currency pair. In order to execute the trade, they need to figure out how many USD (the quote currency) they need to sell in order to get £400.
The exchange rate for the pair at the end of the trading day on June 3, 2021, was 1.4103. This means it cost the trader $1.4103 to purchase £1. To complete the transaction on that day, the trader had to sell 564.12 units of the quote currency in order to get 400 units of the base currency or $564.12 for £400 = (400 x 1.4103).