What is a Currency Cross Pair? Trading with Different Types of Currency Cross Pair

Understanding A Currency Cross Pair

In the past currencies change could first have to be converted into US dollars before converting the dollars into their desired currency.  For instance, if one wanted to convert UK sterling pounds into Japanese Yens, then you would have to convert the sterling into dollars and then convert the dollars into Japanese yen.

However, with the development of currency crosses, it has been easy to bypass the cumbersome process of having to convert currencies to US dollars by directly converting them to desired currencies.

Some of the common crosses include EUR/JPY, GBP/JPY, EUR/GBP, and EUR/CHF.

Calculation of Currency Cross Rates

This section involves numbers, and therefore you have to be good at dealing with numbers.  Although this section is important, the upside is that you don’t have to calculate the cross rates on your own because most broker platforms have these rates already calculated.

However, if you want to satisfy your curiosity of knowing how everything works you this section will be helpful. You will get to understand how to calculate the buying and selling prices of a currency cross.

How to calculate bid/ask prices

Let’s assume that we want to ascertain the buying/selling price for GBP/JPY. First, you have to look at the buying/selling price for USD/JPY and GBP/USD because the two pair have the US dollar as the common denominator. The pairs are referred to as the legs of GBP/JPY since they are the USD related to it.

For example, if the GBP/USD is 1.5630 (bid)/ 1.5635 (ask) and the USD/JPY is 89.38 (bid)/ 89.43 (ask) then to get the bid price of GBP/JPY you will need to multiply the bid prices of USD/JPY and GBP/USD. And to get the asking price you will equally need to multiply the ask prices. It is that simple.

Why Trade Currency Crosses?

Why trade currency crosses

Most of the forex market transactions of around 80% involve the US dollar because it is considered as the reserve currency across the globe. You may wonder why the US dollar is preferred to other currencies such as the euro or UK sterling pound.

Agricultural and oil commodities priced in US dollars

Normally most commodities like oil and agricultural products are priced in terms of US dollars. If any country is looking to buy agricultural products or purchase oil, it would be required to first convert its currency into US dollars before purchasing the goods. This is the reason behind most countries keeping a reserve of the US dollars so that they can be able to make purchases quickly and easily because they will already be having Greenbacks in their pockets.

Australia, China, and Japan are some of the heavy oil importers in the world, and as a result, they have huge US dollar reserves in their central banks. For instance, China is said to have a reserve stockpile of more than 3 trillion US dollars.

Trading currency crosses depends on the US dollar, and since most crossing depends on the US dollar, therefore, the majority of the trading prediction is dependent on whether the US dollar is strong or weak.

Strength or weakness of the dollar affects liquid currency pairs

The strength or weakness of the dollar has a great impact on liquid currency pairs. Some of the major currency pairs include GBP/USD, EUR/USD, USD/CHF, and USD/JPY. The commodity pairs include USD/CAD, AUD/USD, and NZD/USD. You should note that all these pairs are associated with the US dollar.

Traders, therefore, do not get many options when the majority of their trading choices depend on this sole forecast. Mostly when trading any of the seven major currencies, you will have to take a pro-US dollar or anti-US dollar stance.

The sole speculation normally impacts the pairs across the board in a similar manner.

However, in the stock market, there are multiple choices of the company for traders to select from, and they are usually not limited to a single major prediction idea.

As shown in the chart with stock markets, although the market was positive, there were still other numerous trading opportunities for traders. The upside is that there isn’t single speculation that will impact on the whole stock market.

More trading opportunities from currency trading

Besides the seven main dollar-based pairs, the currency crosses also offer a number of currency pairs that traders can venture and reap big. When you trade currency crosses, you give yourself access to more choices for trading opportunities since the currencies are not tied to the US dollar, which offers the potential of having varying price change behaviors.

Although most markets will trade on the pro-US dollar or anti-US dollar sentiments, there is a possibility of finding new currency crosses opportunities. For instance, you may get that all the dollar-based pairs are trading sideways or sometimes in an unpleasant fashion where the smart thing exercise patience and hold on for suitable trade setups.

However, if you are smart and know how to switch charts to consider currency crosses, then you are likely to benefit from numerous opportunities. Most traders usually trade in majors, but you can be different and create your niche by trading in currency crosses.

Currency Crosses Are Trend-y

What Do You need to Know About Currency Crosses?

The U.S. dollar is one of the most important currencies in the forex market. It is a known fact that the United States economy is the leading economy in the world, which means U.S. dollar-based currency pairs are prone to react sharply to U.S. news report.

What this means for the traders is that they can note numerous “spikes” even before there is a clear trend. Such spikes confuse traders as it becomes tough to range indications or spot a clear trend.

The regular economic activities never allow U.S. dollar-based currencies to trade in the absence of volatility and form smooth trends. The same is indicated for the EUR/USD pair in the above chart.

Conversely, it can be noted that during the same date period, cross-currency EUR/JPY formed an extremely smoother ride to the top. This difference in the trading pattern can be probably due to fewer spikes arising from U.S. data.

The charts of two pairs indicate that the euro currency showed strong gain during this time frame. However, the cross-currency EUR/JPY was more easy to trade as it gave a clear trend to traders. In fact, the traders who made a timely entry into this pair as per the trend, they were able to profit almost a hundred pips.

Traders who initiate their transactions as per the ongoing trade should always look for currency crosses as they are much easier to trade as compared to the major pairs. It is easy to identify the trend and be more assured of entry points.

Trade Interest Rate Differentials

How To Benefit From Interest Rate Differentials?

Interest rate differential can be defined as a difference in interest percentage between two currencies in a given pair. For example, if one currency shows an interest rate of 5% while the other boasts an interest rate of 1%, then the interest rate differential is 4%. The application of interest rate differentials remains of specific concern in forex markets due to pricing purposes.

Traders can always sell currencies whose nation has a lower interest rate versus currencies whose nation boasts a higher interest rate. This strategy helps the traders to make gains from the interest rate differential, which is also termed as a carry trade. Price appreciation also plays an important part in this transaction.

Well, such kinds of trades are extremely lucrative for traders. Currency crosses provide several currency pairs with an impressive interest rate differentials.

For instance, in the above chart, AUD/JPY is showing a strong uptrend. Anyone who had a bullish position on this currency pair would have recorded a huge profit. Moreover, between these currencies, the interest rate differential was huge.

When seen in years from 2002 to 2007, the BOJ maintained their rates at 0% while Reserve Bank of Australia managed to increase rates to 6.25%. That means traders made remarkable profits off their long position in the AUD/JPY currency pair. Again, it became possible due to the huge interest rate differential on this trade. Usually, interest rates are kept close to zero to boost demand across the economy, while higher interest rate tends to limit capital outflow.

Be Careful Trading Obscure Currency Crosses

Trade Obscure Currency Crosses with Caution

While the yen and euro cross come in the list of the most liquid crosses, there are other currencies crosses too that don’t even comprise the yen, euro, or the U.S. dollar. Such currency crosses are termed as the “Obscure Currency Crosses.” Here, you should note that the major currency pairs always are the favorites of the traders, while the obscure crosses remain to be traded less.

Some of the obscure crosses are currency pairs like AUD/CHF, CAD/CHF, GBP/CHF, and AUD/NZD. You can clearly see they are weird combinations, and that is the reason why the name goes as obscure crosses. Trading in such currency pairs is riskier and extremely difficult as compared to trading in yen or euro currency crosses. The reason behind the poor interest in obscure currency crosses results in low transaction volume, which eventually leads to lower liquidity.

Following the illiquidity in the obscure crosses, their prices tend to become volatile, and traders prefer to stay away from them.

Given below are the charts of GBP/CHF and AUD/CHF:

Such nasty spikes may result in a stop in trade. That’s why the forex traders, who take a position in the obscure pairs, prefer to set a wider stop as compared to stop in main pairs. The choppy movement in these crosses doesn’t allow traders to make good money. Moreover, due to poor transaction volume in these trades, the spreads on the obscure pairs are extremely wide. If you intend to trade these obscure currency crosses, then be prepared for some big price swings and be set to deal with the massive spread in these crosses.

How to Trade Fundamentals With Currency Crosses

How to Balance Trade When Considering Currency Crosses And Fundamentals?

Traders prefer to initiate a trade based on the news, events, or economic data. For example, if positive economic data is released in Australia, then traders would prefer to go long in AUD. Their first reaction would be to go long on AUD/USD pair.

So far, so good, but there can be a confusing situation when at the same time, the data also shows that the U.S. is witnessing strong economic growth. In such a scenario, the price action in AUD/USD may die out. Well, don’t lose heart as this is the time when you can initiate a cross-currency trade. You need to match the AUD currency against the currency of a country whose economy is not performing so well.

For example, you noticed that the economy of Japan is not faring so well at the moment. In such an instance, you can always take a buy trade on AUD/JPY. In the chart below, see the relative strength of AUD/JPY versus AUD/USD.

Traders can go ahead and look for more currency pairs. They can compare Australia currency against other currencies, including CAD, GBP, and EUR. From there, they can decide which the weakest currency from this list to trade against and make some quick gains.

Fundamentals will always give you an indication as to where you can put your money. But then it is you who have to look at the possible options, make analysis, and recognize the profitable opportunities. Well, anything is possible when you have the option to trade in currency crosses.

How to Trade a Synthetic Currency Pair and Why You Probably Shouldn’t

Should You Trade In A Synthetic Currency Pair?

There are times when institutional forex traders find it tough to trade in certain currency crosses. The reason being this problem is that they trade in massive volume, but there isn’t ample liquidity in these currency crosses to support their order. As a result, they have to build a “synthetic pair,” which helps them to execute their anticipated trade.

Form a Synthetic Currency Pair

Let us take an example of an institutional forex trader who intends to go long in GBP/JPY pair, but is unable to do so following poor liquidity in the pair. In such a scenario, the trader would have to go long on both USD/JPY and GBP/USD. These pairs are termed as its legs. Traders can achieve this because there exists ample liquidity in USD/JPY and GBP/USD, allowing them to execute large trades.

The same is the scenario for a retail forex trader, who is looking to trade like a seasoned institutional trader, has to trade in synthetic currency pairs. However, that would not be smart.

Thanks to the internet, technology has seen massive growth in the last few years that now even obscure currency crosses like CHF/JPY and GBP/NZD can be traded on forex broker’s platform. In addition to having improved access to a broad menu of currency pairs, the spreads are tighter on the currency crosses as against the synthetic pairs.

But forming a synthetic currency pair needs trader to initiate two distinct positions and each one of these two needs its margin. This excessive lock-up capital in a trader’s trading account. However, that is not the case when trades are initiated simply in cross-currency. It is the reason why trading in cross currency is always better than creating synthetic pairs.

Trading the Euro and Yen Crosses

Trading the Yen And Euro Crosses

The U.S. dollar, followed by the yen and euro are the most traded currencies in the forex market. And also like the U.S. dollar, the yen and euro are kept as reserve currencies by different nations. So, this makes the yen and euro cross the most liquid, besides the major pairs.

Understanding trade in Euro crosses

The most prevalent EUR crosses are EUR/GBP, EUR/CHF, and EUR/JPY. News that impacts the Swiss franc or euro will be seen more in EUR crosses as compared to USD/CHF or EUR/USD. Similarly, the news stemming out of the U.K. will significantly impact EUR/GBP.

Strangely enough, U.S. news also impacts the price movement of the EUR crosses. Also, it U.S. results in strong moves in USD/CHF and GBP/USD. This affects the movement of the CHF and GBP against the U.S. dollar and also impacts the price of CHF and GBP against the EUR.

A significant move higher in the U.S. dollar will tend to witness a higher EUR/GBP and EUR/CHF. The same thing stands true when the trend is in the opposite direction. Lets understand this by taking an example. Suppose, the U.S. releases positive economic data having a positive impact on the price movement of USD. This indicates that GBP/USD would decline. Also, USD/CHF would surge, also dragging the price of the CHF lower.

The decline in GBP price would further result in the price increase of EUR/GBP. A decline in CHF price would result in a bullish momentum of EUR/CHF.

Understanding trade in Yen crosses

The JPY trades against all the major currencies. EUR/JPY boasts the highest volume of the yen crosses. AUD/JPY, NZD/JPY, and GBP/JPY are interesting carry trade currencies as they provide impressive interest rate differentials against the yen. If you are planning to trade in JPY currency cross pairs, then do watch out the movement in the USD/JPY pair.

How Cross Currency Pairs Affect Dollar Pairs

Does Cross Currency Pairs Affect U.S. Dollar Pairs?

In this article, we will analyze if the cross-currency pairs have an impact on U.S. dollar pairs. Let us assume that the Fed reports that they will increase interest rates. On the release of this news, the traders start building a long position in the U.S. dollar against all major currencies. As a result, GBP/USD and EUR/USD decline while USD/JPY and USD/CHF rise.

Traders who were short on EUR/USD will be delighted to witness positive price moves in their trades. However, this happiness is short-lived as they will notice their friends who were long in USD/JPY making much more money than them. This will be surprising, or rather say shocking for you. As a result, you will compare the charts of USD/JPY and EUR/USD and note that USD/JPY records the bigger move.

It surpassed a key technical resistance level and surged 200 pips. At the same time, EUR/USD barely declined 100 pips and could not fail to breach a key support level. This may confuse you even more than how come the EUR/USD trade didn’t do as good as USD/JPY trade? The answer is currency crosses (EUR/JPY) resulted in this move.

When USD/JPY surpassed its key resistance level, the combination of breakout and stops being hit, led the prices to go even higher. Bullish positions in USD/JPY pair weaken the yen, which resulted in EUR/JPY to go above its major resistance level. This resulted in the euro to strengthen and lowered the decline of EUR/USD trade. The message is that even if the trader has a position in the major currencies, their trades will be impacted due to movement in cross currency pairs.

Conclusion: Currency Crosses

All About Currency Crosses

Several trade opportunities are showcasing themselves in the foreign exchange market other than understanding how the Greenback will move any given day. In any scenario, a trader should remember certain points as explained under.

Crosses offer forex traders several pairs to trade, which indicates more trading opportunities. There are cleaner ranges and trends on currency crosses as compared to the major pairs. Traders can benefit from the interest rate differentials by initiating trades in currency crosses. Don’t forget to perform your analysis. Do your due diligence and based on your study match the bullish currencies against the bearish ones. Don’t panic if the currency pair you want to trade-in isn’t there with your broker. You understand how to build a synthetic pair by simultaneously taking a short or long position in two major pairs to get one currency cross. The most common euro crosses are the EUR/GBP, EUR/CHF and EUR/JPY.

AUD/JPY, NZD/JPY, and GBP/JPY are interesting carry trade currencies as they have the premium interest rate differentials against the Japanese yen. If you are looking to trade in obscure currency crosses, then be prepared to handle wider spreads and wild price swings.

Another point to remember is that even if you trade in the major pairs, you can use currency crosses to make a decision on which pairs to trade. Crosses can help a trader know which currency is bullish. Always, pay heed to the pip value of the currency cross you are taking positions in. Some crosses will have a lower or higher pip value than the major pairs.