Did you wonder before what are cross pairs or crosses in Forex? Forex trading or foreign exchange is the process of exchanging one currency for another currency. Currency exchange has always been a common financial process used mainly for commerce, trading, tourism, and even investing. In the Forex market, currency pairs are sold and bought daily in huge trading volumes.
Forex trading is the speculation on currency prices for potential profits. Since forex trading is primarily exchanging one currency for another, currencies in the forex market are traded in pairs. The currency pair is a quotation for one currency against the other; known as quote currency and base currency.
Trading a currency pair means that you buy or sell the base currency against the quote currency. That’s how trading currency pairs basically works. Since there are numerous currency pairs traded daily, they are categorized as major and minor or cross pairs, according to the daily trading volume.
So, what are Cross Currency Pairs?
A cross currency pair is the currency pair that does not involve the US dollar. The crosses have slightly wider spreads. Despite enjoying sufficiently liquid markets, they are not as liquid as major pairs. The cross pairs with higher trading volumes are the ones that include a major currency. Some examples of cross currency pairs are; EUR/GBP, GBP/JPY, and EUR/CHF.
While forecasting the EUR/GBP can be difficult because the interlinking economies of the UK and Eurozone, EUR/JPY is way easier to forecast. It also enjoys larger trends than USD/JPY as both the US dollar and the Japanese Yen are both perceived as safe-haven currencies. This makes the EUR/JPY a more popular cross currency pair, same as the EUR/CHF pair.
There are also what is called by exotic currency pairs; pairs that include currencies of emerging markets. They are not as liquid as majors or crosses, and the spread is also much wider.
How Cross Currency Pairs Emerged?
By the end of World War II, most currencies were pegged and quoted against the US dollar as the U.S. economy was the strongest in the post-war era and its currency was fixed to gold back then. So, when individuals wanted to exchange a sum of money into a different currency, they were required first to convert that money into US dollars and then convert it into the desired currency. So, crosses transactions were not smooth under this system. Although the U.S. dollar is still the world’s top reserve currency, the boom of the forex market has made cross currency pairs more common and easier.
Why trade Cross Currency Pairs?
Currency crosses offer more trading opportunities with more currency pair options to choose from. Since they are not dominated by the sentiment around the US dollar as majors, they tend to have their unique price behavior. Cross pairs usually feature clear price trends; hence they are easier to analyze and predict, unlike major pairs. You can also benefit from the interest rate differential by buying the higher-yielding currency against the lower-yielding one. Also, by trading crosses you can avoid high price volatility of major pairs caused by big events.
How to Calculate Currency Cross Rates?
The price of cross pairs is highly dependent on the price of each currency against the US dollar. Let’s say you want to know the trading price for EUR/JPY, then you’ll need to check prices for EUR/USD and USD/JPY. Both major pairs are the core driver for the cross-price. To calculate the bid or ask price for EUR/JPY price, simply multiply the bid or ask prices for EUR/USD and USD/JPY. The number you get is the price of EUR/JPY.
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