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Trading Cross Currencies

Trading Cross Currencies

Cross currencies simply refer to currency pairs, or crosses, that do not involve the US Dollar.  As the US Dollar is the most heavily traded currency in the Forex market, one can think of cross currencies as being more obscure than the major currency pairs.

Euro and Yen Crosses

Behind the US Dollar, the Euro and the Japanese Yen are heavily traded and often held as reserve currencies by various nations.  As such, several Euro- and Yen-based crosses exist, including: EUR/GBP, EUR/JPY, GBP/JPY, CHF/JPY, EUR/CHF (CHF being the Swiss Franc), EUR/CAD, EUR/AUD, and EUR/NZD.

More Obscure Cross Currencies

While Euro- and Yen- based crosses can be considered more obscure than US Dollar-based crosses, they are still commonly traded.  Even more obscure crosses exist, and do not include the US Dollar, the Euro, nor the Yen.  These pairs include: GBP/CHF, CAD/CHF, AUD/NZD, and AUD/CHF.

Trading in these pairs is often more difficult and riskier than trading major pairs.  As they are traded by far fewer traders, volume is significantly lower and liquidity can be difficult at times.  Also, as these currencies represent countries with smaller economies, smaller fluctuations in either country’s economic output can have more volatile effects on the currency pair.

Use as Relative Strength

Some Forex traders choose not to trade particular cross currency pairs, such as the EUR/GBP, but don’t ignore them completely.  Many of the more obscure cross currencies can provide clues about the relative strength of their US Dollar- or Yen-paired relatives.

How does this work?  In many situations the technical chart patterns and associated trade setups may look similar for both the EUR/USD and the GBP/USD, as an example.  Suppose a trader predicts dollar weakness against both the Euro and the British pound, but wants to avoid double exposure to the dollar in the event it strengthens instead of weakens.  Should the trader sell the EUR/USD, or sell the GBP/USD?

The answer to this question may become easier upon inspection of the EUR/GBP.  If this cross currency pair is trending upward it indicates the Euro is stronger than the pound.  In this scenario, a trader wanting to BUY either the EUR/USD or the GBP/USD, buying the EUR/USD would be the better option.  Since the pound is weaker, relative to the Euro, if it proves to strengthen against the US Dollar it is likely to strengthen less than the Euro – hence the EUR/USD is a better long trade than the GBP/USD.