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The global forex market is a diverse place of exchange where currencies from some of the wealthiest economies are bought and sold. These are often referred to as major currencies and make up the bulk of the trading volume on the market. Major currency pairs all involve the U.S dollar, which has been the de facto world reserve currency for decades now.
However, not all pairs have to include the U.S dollar. In fact, some of the most popular regional minor pairs do not include the dollar at all.
Such currency pairs are called cross currency pairs. For example, EUR/GBP is a cross currency pair, as it does not involve the USD as the base, or the quoted currency.
Cross currency pairs serve an important function in the forex market and often present more profitable opportunities to traders than the major currencies involving the greenback.
If you are a beginner trader and would like to know more about cross currencies, this Investfox guide is for you.
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.
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 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.
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.
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.
Cross currency pairs in forex trading involve the direct exchange of two major currencies without the U.S. dollar. For example, EUR/GBP. Traders speculate on the relative strength of these two currencies, bypassing the USD as an intermediary.
Cross currency pairs can be more volatile than major pairs due to lower liquidity and sensitivity to regional economic events. Their volatility varies, with some crosses experiencing higher price fluctuations, making risk management crucial.
Cross currency pairs should be traded during their respective regional market hours, considering liquidity. For example, EUR/GBP is best traded during the overlap of European and London sessions, whereas AUD/NZD is active during the overlap of Australian and New Zealand sessions.