In most cases, a pip is equal to .01% of the quote currency, thus, 10,000 pips = 1 unit of currency. In USD, 100 pips = 1 penny, and 10,000 pips = $1. A well known exception is for the Japanese yen (JPY) in which a pip is worth 1% of the yen, because the yen has little value compared to other currencies. Since there are about 120 yen to 1 USD, a pip in USD is close in value to a pip in JPY. (See Currency Quotes; Pips; Bid/Ask Quotes; Cross Currency Quotes for an introduction.) Because the quote currency of a currency pair is the quoted price (hence, the name), the value of the pip is in the quote currency. So, for instance, for EUR/USD, the pip is equal to 0.0001 USD, but for USD/EUR, the pip is equal to 0.0001 Euro. If the conversion rate for Euros to dollars is 1.35, then a Euro pip = 0.000135 dollars.
Converting Profits and Losses in Pips to USD
To calculate your profits and losses in pips to your native currency, you must convert the pip value to your native currency. The following calculations will be shown using USD as an example. When you close a trade, the profit or loss is initially expressed in the pip value of the quoted currency. To determine the total profit or loss, you must multiply the pip difference between the open price and closing price by the number of units of currency traded. This yields the total pip difference between the opening and closing transaction. If the pip value is USD, then the profit or loss is expressed in USD, but if USD is the base currency, then the pip value must be converted to USD, which can be found by dividing the total pip profit or loss by the conversion rate.
Example—Converting Pip Values to USD.
You buy 10,000 Canadian dollars with USD, with conversion rate USD/CAD = 1.100. Subsequently, you sell your Canadian dollars for 1.1200, yielding a profit of 200 pips in Canadian dollars. Because USD is the base currency, you can get the value in USD by dividing the value by the exit price of 1.12. 10,000 CAD x 200 pips = 2,000,000 pips total. Since 2,000,000 pips = 200 Canadian dollars, your profit in USD is 200/1.12 = 178.57 USD.
For a cross pair not involving USD, the pip value must be converted by the rate that was applicable at the time of the closing transaction. To find that rate, you would look at the quote for the USD/pip currency pair, then multiply the pip value by this rate, or if you only have the quote for the pip currency/USD, then you divide by the rate.
Example—Calculating Profits for a Cross Currency Pair
You buy 100,000 units of EUR/JPY = 164.09 and sell when EUR/JPY = 164.10, and USD/JPY = 121.35. Profit in JPY pips = 164.10 – 164.09 = .01 yen = 1 pip (Remember the yen exception: 1 JPY pip = .01 yen.) Total Profit in JPY pips = 1 x 100,000 = 100,000 pips.Total Profit in Yen = 100,000 pips/100 = 1,000 Yen Because you only have the quote for USD/JPY = 121.35, to get profit in USD, you divide by the quote currency’s conversion rate:
Total Profit in USD = 1,000/121.35 = 8.24 USD.
Foreign Exchange Strategy Alert - Establish Short EUR/USD
- There are increasing signs that the combination of the strong EUR, sharply higher energy prices, cumulative ECB tightening and weakening global growth are weighing heavily on Euro zone growth, with a risk of no ECB rate hike this year.
- At the same time, expectations for US growth and interest rate hikes have adjusted sharply lower, suggesting limited further downside for the USD.
- Accordingly, it is time to structure exposure for a gradual, but significant, decline in EUR/USD during the years ahead, and recommend establishing core short EUR/USD at 1.5920, targeting the January 22 low of 1.4365 with a two-day stop above 1.6250.
- It appears the shift in US interest rate expectations is near complete. At the same time, while there are ongoing concerns about the US financial sector, it is noteworthy that over the 4 weeks ended July 9, data on custody holdings at the NY Fed show that foreign central banks and official institutions accumulated $40.9 billion in US securities.
- The fall in the German ZEW confidence index to a record low in July highlights the sharp deterioration of confidence in future economic performance.
- Increasing energy costs and weakening export growth suggest that the EZ trade and current account balances are likely to fall further, and the weakening of investor confidence does not bode well for inflows of long-term capital.
- While EUR-denominated oil prices have been rising gradually since their low in early 2007, they surged 38% during 2Q 2008, creating new downside risks for consumer spending and business confidence.
- Although EZ oil-driven headline inflation is still heading up, even as the economy is turning down, the no-longer negligible risk of a recession will probably prevent any further ECB rate hike.
- Strong growth in the US export economy, there is the potential that Euro zone growth momentum falls below that of the US during 2H 2008, possibly extending into early 2009.
- Even with the current expectations for less than one hike by the FOMC and a small probability of another hike by the ECB, the surge in EUR/USD to a new record high today appears increasingly unsustainable. And a further shift in relative rate expectations later this year could push the 2-year swap spread well below 150bp, consistent with EUR/USD closer to 1.50 than 1.60.
- From a technical perspective it appears a triple momentum divergence could suggest an end to the EUR/USD upswing.
- The new record highs for EUR/USD set on April 22 and July 15 have taken place on declining relative strength. The series of new peaks on declining momentum would suggest the EUR/USD surge may have run its final lap.
- Given all above said, stablishing core short EUR/USD exposure is recommended.
