Forex Cross Currency Pairs

On Forex there are cross-currency pairs, which do not include the US dollar, unlike major currency pairs.

The analysis of the US dollar movement is of crucial importance in trading major currency pairs. The analysis of the second currency quoted in a pair (EUR - the euro, JPY - the Japanese yen, CHF - the Swiss franc, GBP - the British pound) is not that essential. Trading major currency pairs is quite a profitable strategy. Still, dealing with such pairs is worth trying, once you have gained some experience on Forex.

Cross-currency pairs. The value of a currency in such pair is denominated in the other currency units - not in USD. The rates of these pairs are called cross-rates.

The most-traded pairs are those containing the euro, for instance, EUR/CHF, EUR/GBP, EUR/JPY. These pairs are distinctive due to their high liquidity. A currency pair can sometimes grow more liquid than USD/CHF because of institutional players, willing to work with the Swiss franc.

The yen is an integral part of another cluster of cross-currency pairs: CAD/JPY - the Canadian dollar and yen, NZD/JPY - the New Zealand dollar and yen, as well as GBP/JPY - the British pound and yen. This cross-currency cluster is quite popular with investors and traders as they can engage in carry trade with its pairs. Carry Trade is selling a certain currency with a relatively low interest rate (for example, the yen) and then buying a currency with a higher interest rate. This scheme enables a trader to gain profit from the difference between the two rates.

The highest interest rates are those of the following developed countries: Canada, New Zealand and Great Britain. The currencies of these countries are thus the most widely used in carry trade against the Japanese yen.

A trader dealing with major currency pairs can face a situation, when the US dollar will be just as strong as the second currency quoted in a pair. The situation is tricky as USD is rather unpredictable. If both the USA and eurozone show persistent economic growth, it is unclear which decision to make - either to open or close a deal. Trading in EUR/JPY is optimal when the yen is pressed bya geopolitical factor, for example.

The most popular cross-currency pairs are as follows:

EUR/CHF - Eurozone is Switzerland's major trading partner. The Swiss franc has rather a low interest rate, which makes this currency preferred for carry trade deals. The pair has been showing a positive trend since 2006.

EUR/JPY - A much-used cross-currency pair owing to its interrelation with USD/JPY and EUR/USD. Traders often speculate on its movement, relying upon interest rates and differences between the growth rates of Japan and eurozone.

NZD/JPY - This pair is in great demand among cross-currency pairs at carry trade dealing, as it has the widest difference between the interest rates. The pair is good for long positions, particularly if general fundamental and technical indicators are favourable for its growth.

EUR/GBP - Eurozone is the second important trading partner for Great Britain. So, if a trader takes into account the fundamental factors regarding England and the British pound, he is sure to work with this particular pair since GBP/USD is most affected by USD movement on the market.

CAD/JPY - One can use the ability to foresee the upcoming oil prices trend trading with this cross currency pair. Canada has the second largest oil reserves in the world. This country is a net exporter of oil, so that it gains profit from rising oil prices, whereas the major oil importer, Japan, suffer losses. Thus, opening long positions with this pair is the most profitable ahead of oil price spike.

Working with cross-currency pairs, a trader can open carry trade deals. The differences between the two countries are a good advantage in trading. Each cross-currency pair has its characteristics, interest rates differences; it is dependent on certain political and economic events, determining its trend.