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.

FOREX Glossary

Here are some of the most common terms used in FOREX trading. Ask Price – Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote – e.g. EUR/USD 1.1965 / 68 – means that one euro can be bought for 1.1968 UD dollars.

Bar Chart – A type of chart used in Technical Analysis. Each time division on the chart is displayed as a vertical bar which show the following information – the top of the bar is the high price, the bottom of the bar is the low price, the horizontal line on the left of the bar shows the opening price and the horizontal line on the right of bar shows the closing price.

Base Currency – is the first currency in a currency pair. A quote shows how much the base currency is worth in the quote (second) currency. For example, in the quote - USD/JPY 112.13 – US dollars are the base currency, with 1 US dollar being worth 112.13 Japanese yen.

Bid Price – is the price a trader can sell currencies. The Bid Price is shown on the left side of a quote - e.g. EUR/USD 1.1965 / 68 – means that one euro can be sold for 1.1965 UD dollars.

Bid/Ask Spread – is the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker.

Broker – the intermediary between buyer and seller. Most FOREX brokers are associated with large financial institutions and earn money by setting a spread between bid and ask prices.

Candlestick Chart - A type of chart used in Technical Analysis. Each time division on the chart is displayed as a candlestick – a red or green vertical bar with extensions above and below the candlestick body. The top of the extension shows the highest price for the chart division and the bottom of the extension shows the lowest price. Red candlesticks indicate a lower closing price than opening price, and green candlesticks indicate the price is rising.

Cross Currency – A currency pair that does not include US dollars – e.g. EUR/GBP.

Currency Pair – Two currencies involved in a FOREX transaction – e.g. EUR/USD.

Economic Indicator – A statistical report issued by governments or academic institutions indicating economic conditions within a country.

First In First Out (FIFO) – refers to the order open orders are liquidated. The first orders to be liquidated are the first that were opened.

Foreign Exchange (FOREX, FX) – Simultaneously buying one currency and selling another.

Fundamental Analysis – Analysis of political and economic conditions that can affect currency prices.

Leverage or Margin – The ratio of the value of a transaction to the required deposit. A common margin for FOREX trading is 100:1 – you can trade currency worth 100 times the amount of your deposit.

Limit Order – An order to buy or sell when the price reaches a specified level.

Lot – The size of a FOREX transaction. Standard lots are worth about 100,000 US dollars.

Major Currency – The Euro, Swiss franc, British pound, and the Japanese yen are the major currencies.

Minor Currency – The Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies.

One Cancels the Other (OCO) – Two orders placed simultaneously with instructions to cancel the second order on execution of the first.

Open Position – An active trade that has not been closed.

Pips or Points – The smallest unit a currency can be traded in.

Quote Currency – The second currency in a currency pair. In the currency pair USD/EUR the euro is the quote currency.

Rollover – Extending the settlement time of spot deals to the current delivery date. The cost of rollover is calculated using swap points based on interest rate differentials.

Technical Analysis – Analysis of historical market data to predict future movements in the market.

Tick – The minimum change in price.

Transaction Cost – The cost of a FOREX transaction – typically the spread between bid and ask prices.

Volatility – A statistical measure indicating the tendency of sharp price movements within a period of time.