What Is an Indirect Quote?
Let me explain what an indirect quote is in the foreign exchange markets. It's the amount of foreign currency you need to buy or sell one unit of your domestic currency. We also call this a 'quantity quotation' because it focuses on the quantity of foreign currency required for the domestic base. Here, the domestic currency is the base, and the foreign one is the counter. This is different from a direct quote, which prices the foreign currency in terms of the domestic one.
Key Takeaways
Remember, an indirect quote in forex tells you how much foreign currency exchanges for one unit of domestic currency. It's known as a quantity quotation since it shows the foreign currency amount needed to buy domestic units. In contrast, a direct quote gives the price of one foreign currency unit in domestic terms. If the exchange rate drops in an indirect quote, that means the domestic currency is depreciating. You need to understand if a quote is direct or indirect to price cross-currency rates correctly.
How Indirect Quotes Work in Forex
An indirect quote is essentially the reciprocal of a direct quote, which we also know as a price quotation that shows the price of one foreign currency unit in variable domestic units. In global forex markets, the U.S. dollar dominates, so we usually use direct quotes with USD as the base and other currencies like CAD, JPY, or INR as counters. But exceptions exist for the euro and Commonwealth currencies such as GBP, AUD, and NZD, which often use indirect quotes—for instance, GBP 1 = USD 1.30.
Consider the CAD trading at 1.2500 to the USD. From Canada's view, the indirect quote is C$1 = US$0.8000, which is 1 divided by 1.2500. But in standard forex markets, we quote it as 1.2500, an indirect quote from the U.S. perspective, showing how much CAD you need for 1 USD. The direct quote would be USD 0.8000.
When the exchange rate lowers in an indirect quote, the domestic currency weakens. Using the example, if USD/CAD shifts to US$1 = C$1.2300, the USD is weaker because you need less CAD for 1 USD. The direct quote becomes 0.8130, meaning 1 CAD gets you more USD than before.
Navigating Currency Cross Rates
Now, let's talk about cross-currency rates, which price one currency against another without involving the USD. You must determine if a quote is direct or indirect to get these right. For instance, if USD/JPY is 100 and USD/CAD is 1.2700, what's CAD/JPY from Canadian and Japanese perspectives? The conventional quote is USD/JPY divided by USD/CAD. If CAD is domestic, 1 CAD indirect equals 100 divided by 1.2700, which is 78.74 JPY. If JPY is domestic, 1 JPY indirect is 1.2700 divided by 100, or 0.0127 CAD.
Frequently Asked Questions
You might wonder if there's another name for an indirect quote. Yes, it's also called a quantity quotation, as it specifies the foreign currency quantity for domestic units. How does it work? A lower rate in an indirect quote means your domestic currency is depreciating or getting weaker. What's the opposite? That's a direct quote, or price quotation, showing foreign currency price in domestic units.
The Bottom Line
To wrap this up, an indirect quote, or quantity quotation, reveals how much foreign currency you need for one domestic unit. It differs from a direct quote, which uses foreign currency as the base. If the rate falls in an indirect quote, your domestic currency is losing value. Grasping whether a quote is direct or indirect helps you handle cross-currency rates effectively, which is essential whether you're new to investing or an experienced trader in forex markets.
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