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Pairing up the Foreign Exchange Rate

Foreign Exchange Rate

ISO equals International Standardisation Organisation in forex speak. It is the organisation central bank leaders created to name forex pairs. ISO codes are the names given to currency pairs and which are used when you want to look up a specific foreign exchange rate. A pair like AUD/USD has a specific rate, but it also has a certain format you will find it under in your forex trading platform. This can be slightly confusing because of all the information published on the Internet. Worries of plagiarism and copying make for changes to standards that should never be altered. There is also the need for travel rates, which can add further confusion to the situation.

Foreign Exchange Rate in Forex versus Travel

Travelling, you have carte blanche for what currency you will need. If you are going to Europe from Australia you will at least want Euros. If you intend on travelling outside Eurozone countries i.e. European countries that have not adopted the euro you will need their local currency too. You can find rates for these pairs. You might think in terms of selling AUD and buying Euros, thus you want to know the current foreign exchange rate for EUR. You might look up AUD/EUR to see what 1 AUD equals in Euros. For a traveller there is nothing wrong with thinking in this manner.

In forex you always trade with the ISO code EUR/AUD in which the foreign exchange rate shown on the trading platform is in AUD because it is the quote currency. You will not be able to find AUD/EUR in the spot forex platform or any of the five other forex trading options.

It does not mean you cannot do a search with a search engine for AUD/EUR. In fact when writing this the rate was 1 AUD equals .6966 EUR. However, if you traded in the forex market you would see 1 EUR equals 1.4356 AUD, and when you sell EUR to buy AUD or buy EUR to sell AUD the rate is 1.4356.

Foreign Exchange Rate Pips

The rate for any currency pair has to account for the broker fee. Unlike traditional stock market commissions the forex market has a different system. There is no commission on spot forex transactions. Other types of transactions like ETFs or futures may have commissions, but those are different products to buy/sell currency with. For standard trades the only charge from most brokers is the pip spread.

A pip is the smallest unit of change a rate can undergo, which is .0001 or on some sites it is represented as 1/100th. You will usually see two rates on the trading platform which are the buy and sell foreign exchange rate in which the pip spread is represented. If the current rate is 1.4356 for buying the currency pair then the sell rate is usually 1.4358 or 2 pips higher than the buy rate. This is for major currency pairs like AUD/USD, EUR/USD or GBP/USD. Non major pairings or crosses without the USD are usually a larger pip spread.

 

 

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