How to Determine the Rise and Fall of Exchange Rates

In the process of forex trading, exchange rates are a crucial concept because they directly affect transactions. Many beginners in forex trading do not know how to correctly judge the rise and fall of exchange rates. This is often an important means of analyzing forex market trends, which to some extent requires investors to master relevant technical analysis methods. Below, the author will teach you how to judge the rise and fall of exchange rates.

In practice, there is no fundamental difference between the direct and indirect quotation methods—they are simply opposite forms of quotation, with their values being reciprocals of each other. Due to customary practices, the major currencies that use indirect quotes against the US dollar in the international forex market include the British pound (GBP), euro (EUR), Australian dollar (AUD), and New Zealand dollar (NZD), while most other currencies use direct quotes against the US dollar.

Many people with limited exposure to forex often struggle to distinguish whether an exchange rate is rising or falling when encountering forex quotes. For example:

• If the USD/JPY rate changes from 130 to 134, it can be understood as the USD strengthening or the JPY weakening.

• However, if the EUR/USD rate changes from 0.90 to 0.88, some may not understand why a decrease in value is called the EUR weakening or the USD strengthening.

This is actually due to the two quotation methods used in the international forex market: direct quotation and indirect quotation.

Direct Quotation refers to a method where a fixed amount of a specific foreign currency is used as the standard, converted into a variable amount of the domestic currency. In direct quotation, the amount of the foreign currency remains constant, while the domestic currency amount changes. For example:

• If 1 USD = 1.5960 CAD changes to 1 USD = 1.6050 CAD, since the USD amount is fixed and the CAD amount increases, it means the USD has appreciated while the CAD has depreciated.

• If the rate changes to 1 USD = 1.58 CAD, it means the USD has depreciated while the CAD has appreciated.
  China’s RMB forex rates use the direct quotation method.
  
  

Indirect Quotation refers to a method where a fixed amount of the domestic currency is used as the standard, converted into a variable amount of the foreign currency. In indirect quotation, the domestic currency amount remains constant, while the foreign currency amount changes. For example:

• If 1 GBP = 1.4550 USD changes to 1 GBP = 1.4630 USD, since the GBP amount is fixed and the USD amount increases, it means the USD has depreciated while the GBP has appreciated.

• If the rate changes to 1 GBP = 1.4450 USD, it means the USD has appreciated while the GBP has depreciated.
  
  

Now, do you understand how to determine the rise and fall of exchange rates? Actively learn these judgment techniques, and you will surely succeed!