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 is called the "base currency", and the second
currency is called the "terms currency" (or "quote currency"). The currency pair
indicates how much of the terms currency is needed to purchase one unit of the base
FX (foreign exchange) market convention is such that most currencies, including
the Canadian dollar, are quoted directly against the US dollar. A "direct quote"
always indicates the amount of foreign currency to buy or sell one US dollar. Other
common direct currencies include USDJPY (Japanese yen), USDCHF (Swiss franc), and
USDMXN (Mexican peso). Currencies quoted indirectly include GBPUSD (British pound),
EURUSD (Euro), AUDUSD (Australian dollar), and NZDUSD (New Zealand dollar). There
is no particular reason why a currency is quoted directly or indirectly, it is a
standard market convention that has evolved over time.
If you want to see the rate in terms of Canadian dollars (the CAD rate) as opposed
to US dollars (the USD indicative rate) you must find the indirect rate. Indirect
rates are shown with the USD listed second. For example, CAD rates are indirect
rates and are formatted as CADUSD, i.e. the value of one Canadian dollar in USD
terms. USD rates are direct quotes and are formatted as USDCAD.
A US company needs to pay 50,000 Euros to their supplier in Europe today.
The quoted rate for EURUSD is 1.5699
This means that it will cost (not including margins) 1.5699 US dollars for each
Euro that they need to purchase today.
50,000 x 1.5699 = 78,495
So 50,000 Euros will cost the company $78,495 US dollars today.
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