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John Naronha

What's the difference between direct and indirect FX pairs?

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Exchange rates are determined when two currencies are quoted in relation to the other. The first currency in the pair is the base currency and the second the quoted currency.

When one unit of a domestic currency is expressed in terms of a foreign currency, it is called a “Direct Currency” or a “Direct Quote.” On the contrary, when one unit of a foreign currency is expressed in terms of a domestic currency, it is called an “Indirect Currency” or an “Indirect Quote.”

Example: If you’re trying to determine the exchange rate between the US dollar and Pound Sterling, the pair would generally be quoted as GBPUSD= 1.3250.

Here, Pound Sterling is the base currency while the US dollar is the quoted currency and the exchange rate is quoted as 1 Sterling= 1.3250 US dollars.

The GBPUSD pair is an example of a Direct Currency or a Direct Quote.

On the other hand, if you’re trying to determine the exchange rate between the US dollar and the Japanese yen, the pair would be quoted as USDJPY= 111.75.

Here, the US dollar is the base currency while the Japanese yen is the quoted currency and the exchange rate is quoted as 1 US dollar= 111.75 Japanese yen.

The USDJPY pair is an example of an Indirect Currency or an Indirect Quote.

 

Why are they important?

Besides understanding the basic differences between the two, you will learn to calculate the PIP value for direct and indirect currencies individually as they can be very useful in identifying your profits/losses when you’re trading FX. Also, the calculations are a wee bit different for the two categories of FX pairs

Beginning with direct currencies, if the lot size= 100,000 and the minimum tick size is 0.0001, the PIP value calculation is

PIP= Lot size X tick size

     = 100,000 X 0.0001

PIP= $10

 

For indirect currencies with an identical lot and tick size, the PIP value calculation is

PIP= Lot size X tick size

            Market price

     = 100,000 X 0.0001

               0.9985

PIP= $10.015

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Posted (edited)

Hi John,

Exchange rates are obtained when you quote two currencies in relation to each other. One of them is the base while the other is the quoted currency.  Hence, a direct quote demonstrates a foreign currency unit with reference to a domestic currency. 
Conversely, an indirect quote shows a domestic currency unit with respect to a foreign currency. Suppose a pair is quoted as GBPUSD= 1.3160. The pound represents the base currency, the dollar represents the quoted currency, while the conversion rate is shown as 1 Sterling=1.3160 US dollars. This GBPUSD pair constitutes a direct quote.

In contrast, the conversion rate between the dollar and the yen is presented as USDJPY= 113.65. Here, the dollar shows the base currency and the yen the quoted currency. Therefore, the conversion rate is 1 US dollar=113.65 Japanese yen with the USDJPY pair constituting an indirect quote. 
Low exchange rates in direct quotes reveal a strong domestic currency while a similar scenario in indirect quotes portrays a depreciating local currency.
 

Edited by Becky Lord

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Hello John, and welcome here.

A currency‘s direct or indirect status is subject to the investor’s geographical location. To get the exchange rate, quote one currency relative to the other. In a pair, the base and quote represent the first and second currencies respectively. Therefore, the EUR portrays the base and USD the quote in a EUR/USD arrangement.
Direct Quote
It’s the total domestic currency required to purchase one foreign currency unit. Supposing the EUR is your home currency, your direct quote is USD/EUR. In other words, how many euros do you need to obtain one dollar? A home currency growth is reflected by a reduced exchange rate. Thus, you need to exchange a lower local currency sum to get a foreign currency unit.
Indirect Quote
It’s the total domestic currency gotten from the sale of one foreign currency unit. With the EUR as home currency, the indirect quotation becomes EUR/USD. It explains how many dollars are needed to purchase one euro. Unlike their direct alternatives, shifts involving indirect quotes affect the local currency. Hence, the indirect quote rises with the home currency.
 

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Hi John,

As you probably know already, Forex trading involves trading currencies from different countries. This means that you’re not trading an individual currency, you’re actually trading currency pairs such as - USD/EUR, USD/GBP, EUR/CHF and so on. The price of a currency pair refers to what is known as a “quote”. So when you’re trading currency pairs, they’re displayed with their respective currency symbols and a current price. For instance, the Us Dollar to British Pound currency pair is shown as USD/GBP - 0.81. 

The number 0.81 means that one US dollar is worth 0.81 British pounds. The first currency in the pair, in this example its USD, refers to the accounting or domestic currency. The second currency in the pair, GBP in this instance, represents the named quote currency. Understanding this will help you break down the definition of FX direct quotes. 

Depending on where you’re based and what’s your national currency, every quote can be direct and indirect at the same time. 

A direct FX quote tells you how many foreign currency units could be purchased for a single unit of your local currency. It’s a bit easier to understand direct quotes as they’re used by traders who want to sell foreign units for their national currency. 

Indirect FX quotes are just the opposite of direct pairs. In other words, indirect quotes represent the value of your local currency in a foreign one.

Let’s use the example from above once again, USD/GBP - 0.81. If you’re based in the UK, where GBP is the local currency, this currency pair means that 1 USD is sold for 0.81 British pounds and that’s an indirect quote. On the other hand, if you were based in the US, this same quote would be direct for you. 
 

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