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What are Currency Crosses: Trading Beyond Major Pairs

What are Currency Crosses: Trading Beyond Major Pairs

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Financial Markets, Coincident Indicators, Economic Indicators, Forex Market Volatility

What are Currency Crosses: Trading Beyond Major Pairs

What are Currency Crosses: Trading Beyond Major Pairs

When it comes to forex trading, most traders are familiar with major currency pairs such as EUR/USD, GBP/USD, and USD/JPY. These pairs are the most commonly traded in the forex market and are known for their high liquidity and tight spreads. However, there is another category of currency pairs that offer unique trading opportunities and can provide diversification to a trader’s portfolio. These pairs are known as currency crosses.

Understanding Currency Crosses

Currency crosses, also known as cross currency pairs, are currency pairs that do not involve the US dollar (USD) as one of the currencies. Instead, they consist of two major currencies traded against each other. For example, EUR/GBP, AUD/JPY, and GBP/JPY are all examples of currency crosses.

Why Trade Currency Crosses?

Trading currency crosses can offer several advantages to forex traders:

  • Diversification: By trading currency crosses, traders can diversify their portfolios and reduce their exposure to any single currency.
  • Volatility: Currency crosses tend to exhibit higher volatility compared to major pairs, which can provide more trading opportunities for active traders.
  • Unique Trading Opportunities: Currency crosses can offer unique trading opportunities based on the economic conditions of the countries involved in the pair.

Some of the most popular currency crosses in the forex market include:

  • EUR/JPY: Euro vs. Japanese Yen
  • GBP/AUD: British Pound vs. Australian Dollar
  • USD/CAD: US Dollar vs. Canadian Dollar

Trading Currency Crosses

When trading currency crosses, it is important to consider the unique characteristics of each pair. Factors such as interest rates, economic data, and geopolitical events can all impact the value of a currency cross. Traders should also be aware of any correlations between the currencies in the pair, as this can affect their trading decisions.

Example:

Let’s say a trader is considering trading the EUR/JPY currency pair. If the European Central Bank (ECB) announces an interest rate hike, this could cause the Euro to strengthen against the Japanese Yen. The trader could then take a long position on the EUR/JPY pair in anticipation of further gains.

Risks of Trading Currency Crosses

While trading currency crosses can offer unique opportunities, it also comes with its own set of risks. Some of the risks associated with trading currency crosses include:

  • Higher Spreads: Currency crosses tend to have wider spreads compared to major pairs, which can increase trading costs.
  • Less Liquidity: Currency crosses may have lower liquidity compared to major pairs, which can lead to slippage and difficulty in executing trades at desired prices.
  • Increased Volatility: The higher volatility of currency crosses can lead to larger price swings, which can result in larger gains or losses for traders.

Case Study: GBP/AUD

One example of a currency cross that has exhibited significant volatility in recent years is the GBP/AUD pair. In 2016, the pair experienced a sharp decline due to uncertainty surrounding Brexit and a slowdown in the Australian economy. Traders who were able to anticipate these events could have profited from shorting the GBP/AUD pair.

Conclusion

Trading currency crosses can offer unique opportunities for forex traders looking to diversify their portfolios and take advantage of market volatility. By understanding the characteristics of each currency cross and staying informed about economic events that can impact their value, traders can make informed trading decisions and potentially achieve higher returns. However, it is important to be aware of the risks associated with trading currency crosses and to manage these risks effectively to protect capital.

Overall, currency crosses can be a valuable addition to a trader’s toolkit and can provide a new dimension to their trading strategy.

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