FOREX CROSS CURRENCY PAIRS
At Forex, there are cross currency pairs that do not enter the US dollar, unlike the major currency pairs. Analysis of US dollar movements is an important analysis in trading major currency pairs. Analysis of the second currency quoted in pairs (EUR-Euro, JPY- Japanese Yen, CHF-Swiss Franc, GBP-British pound) is not very important.
Trading major currency pairs is a profitable strategy. However, transacting with cross currency pairs is worth a try, when you already have some experience on Forex .. Cross-currency pair. The value of the currency in the cross currency pair in other currency units – not in US Dollars. This pair value is called cross-rate.
The most frequently traded pair is a pair that includes Euros, for example EUR / CHF, EUR / GBP, EUR / JPY. This pair is different because of their high liquidity. Currency pairs can sometimes grow more volatile than USD / CHF because of institutional players, who want to work using the Swiss Franc.
The yen is an integral part of the cluster of other cross currency pairs:
CAD / JPY-Canadian dollar and Yen, NZD / JPY- New Zealand dollar and Yen and GBP / JPY – British Pound and Yen. This cross currency cluster is quite popular with investors and traders because they can participate in carry trades with partners. Carry Trade is a sale of a particular currency with a relatively low interest rate (for example Yen) then buys a currency with a higher interest rate.
This scheme allows traders to benefit from the difference between two interest rates. The highest interest rate is the value of interest rates from developed countries as follows: Canada, New Zealand, England. This country’s currency is the most widely used currency in carry trades against the Japanese Yen. Traders who trade with major currency pairs will face a situation, when the US dollar is not as strong as the second currency quoted in the pair. The situation is confusing because USD is unpredictable.
If the US and European zones show a strong economy, it is not clear what decision will be made – whether to open or close the transaction. Trading in EUR / JPY is optimal when Yen is pressured by various factors, one of which is geopolitical factors.
The most popular cross currency pairs are as follows:
EUR / CHF – European zone is Switzerland’s main trading partner. The Swiss Franc has a rather low interest rate, which makes this currency selected in carry trade transactions. The pair has shown positive trends since 2006.
EUR / JPY – The cross currency pair is the most commonly used which causes a reciprocal relationship with USD / JPY and EUR / USD. Traders often speculate with its movements, which depend on the value of the interest rate and the difference between Japan’s growth value and the European zone.
NZD / JPY – This pair was asked a lot among the cross currency pairs in the carry trade transaction, because the pair has the biggest difference in the interest rate. This pair is in a good position (Long position).
EUR / GBP – The European zone is the second most important trading partner for the UK. So, if a trader pays attention to the fundamental factors associated with the UK and the British Pound, then he is sure to work with this pair because GBP / USD is the pair most affected by the USD movement in the market.
CAD / JPY – A trader can use the ability to estimate trends in oil prices that will come with the cross currency pair. Canada has the second largest oil deposit in the world. The country is a net exporter of oil, so the country benefits from rising oil prices, where major oil importers, Japan, suffer losses. Therefore opening a buy position with this pair is the most profitable position when there is an increase in oil prices.
Transacting with cross currency pairs, a trader can open a carry trade transaction. The difference between the interest rate is an advantage in trading. Each cross currency currency pair has its own character and the difference in interest rates depends on certain political and economic events, which determine the trend.