The term indirect quote is a currency quotation in the foreign exchange market that expresses the variable amount of foreign currency required to buy or sell one unit of the domestic currency. An indirect quote is also known as a “quantity quotation,” since it expresses the quantity of foreign currency required to buy units of the domestic currency. In other words, the domestic currency is the base currency in an indirect quote, while the foreign currency is the counter currency.
Key Takeaways
- An indirect quote in the foreign exchange markets expresses the amount of foreign currency required to buy or sell one unit of the domestic currency.
- An indirect quote is also known as a “quantity quotation,” since it expresses the quantity of foreign currency required to buy a unit of the domestic currency.
- The opposite of an indirect quote is a direct quote, which expresses the price of one unit of foreign currency in terms of a variable number of units of the domestic currency.
Understanding Indirect Quotes
An indirect quote is essentially the flip side of a direct quote or “price quotation,” which expresses the price of one unit of a foreign currency in terms of a variable number of units of the domestic currency.
As the U.S. dollar (USD) dominates the global forex markets, the standard practice is to use direct quotes featuring the U.S. dollar as the base currency and other currencies—like the Canadian dollar (CAD), Japanese yen (JPY), and Indian rupee (INR)—as the counter currency. Exceptions include the euro and Commonwealth currencies such as the British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD), typically quoted in indirect form (e.g., GBP 1 = USD 1.30).
Consider the example of the CAD, trading at 1.2500 USD. In Canada, the indirect form of this quote would be C$1 = US$0.8000 (i.e., 1/1.2500). However, the standard quotation in forex markets is 1.2500—an indirect quote from the U.S. perspective, indicating how much foreign currency (CAD) is required to obtain 1 USD. Conversely, USD 0.8000 would be a direct quote.
In an indirect quote, a lower exchange rate implies the domestic currency is weakening. Continuing our example, if the USD/CAD quotation changes to US$1 = C$1.2300 (indirect quote), the USD (domestic currency) has weakened since it takes less CAD to obtain 1 USD. The direct quote, now at 0.8130 (1/1.2300), means 1 CAD now yields USD 0.8130 instead of 0.8000.
Currency Crosses
What about cross-currency rates, which express a currency’s value in terms of another currency besides the U.S. dollar? Traders or investors must identify whether a direct or indirect quotation is used to price the cross-rate accurately.
For instance, if USD/JPY is quoted at 100 and USD/CAD is quoted at 1.2700, what is the CAD/JPY quotation from both the Canadian and Japanese perspectives?
CAD/JPY (conventional quote) = USD/JPY ÷ USD/CAD
So, if the domestic currency is CAD:
1 CAD (indirect) = 100 ÷ 1.2700 = 78.74 JPY
And if the domestic currency is JPY:
1 JPY (indirect) = 1.2700 ÷ 100 = 0.0127 CAD
Related Terms: direct quote, base currency, counter currency, exchange rates, cross-currency rates.
