Cross currency pairs, also known as "crosses" or "cross rates," involve trading two major currencies without the U.S. dollar acting as an intermediary. These currencies are directly exchanged between each other without the interference of the U.S. dollar. Such currency pairs often have regional significance and are popular among traders residing in the respective countries represented by each currency. 

For example, AUD/NZD is a cross currency pair that is significant among traders residing in Australia and New Zealand. 

To better understand how cross currency pairs work, we can look at a step-by-step example. 

Regional Significance

Cross currency pairs can serve as indicators of regional trade and investment flows. Traders and investors often monitor these pairs to gauge the impact of trade agreements, tariffs, and economic policies on currencies. For instance, the AUD/NZD pair reflects trade and economic interactions between Australia and New Zealand.

Volatility

Volatility is an important factor with relation to cross currency pairs. The volatility of cross currency pairs varies depending on the specific currencies involved.

Currency pairs with strong economic ties or similar interest rate policies may also exhibit lower volatility.

Cross currency pairs typically have lower trading volumes and liquidity compared to major pairs.

This lower liquidity can result in wider spreads and more significant price gaps, which may contribute to increased volatility during certain trading sessions.

Cross currency pairs can be more sensitive to news and events related to the countries of the currencies involved.

Economic data releases, political developments, and geopolitical events can have a more pronounced impact on the exchange rates of cross currency pairs, leading to increased volatility.

ATR

The Average True Range, or ATR, which measures the average price range over a specified period, is often lower for cross currency pairs compared to major pairs.

This lower ATR can indicate less intraday price movement and potentially lower volatility.

ATR is an important indicator in forex trading and cross currency pairs are typically characterized by lower ATR values. 

Less Market Influence

Major currency pairs, especially those involving the USD, often have a direct impact on other currency markets. In contrast, cross currency pairs may be influenced more by the specific economies of the countries in the pair, making their movements less predictable.

For example, the exchange rate of AUD/NZD might affect the trade relations between Australia and New Zealand, but have little to no major implications on the global economy. 

From the factors mentioned above, traders can surmise that trading cross currency pairs have inherent advantages and disadvantages that need to be considered in order to construct profitable trading strategies on the forex market. 

Pros

• Cross currency pairs offer traders a way to diversify their forex portfolios by trading currencies from different regions, reducing risk associated with exposure to a single currency or economy
• Traders can employ specialized trading strategies using cross currency pairs to take advantage of unique regional dynamics, interest rate differentials, and economic trends
• Trading cross currencies provides insights into the economic and geopolitical relationships between regions, allowing traders to stay informed about global developments and their impact on the forex market

Cons

• Cross currency pairs often have lower trading volumes and liquidity compared to major currency pairs, which can result in wider spreads, increased slippage, and reduced ease of execution
• Due to lower liquidity, trading costs may be higher when trading cross currency pairs, as brokers often charge higher spreads and commissions for these pairs
• Cross currency pairs can be more volatile due to their lower liquidity and sensitivity to regional economic events and news. This volatility can lead to unpredictable price movements and increased risk

• Cross currency pairs are pairs that do not involve the U.S. dollar
• Cross currency pairs have regional significance and largely depend on the trade relations between the issuing countries 
• These pairs tend to be more volatile than major currency pairs, as they are characterized by low liquidity 
• Traders and investors use these pairs to gain insights into regional economic relationships, trade dynamics, and the impact of geopolitical events and monetary policies on the forex market