Although the vast majority of
currency trading takes place in the dollar pairs, cross-currency pairs serve as
an alternative to always trading the U.S. dollar. A cross-currency pair, or cross or crosses for short, is any
currency pair that does not include the U.S. dollar. Cross rates are derived
from the respective USD pairs but are quoted independently and usually with a
narrower spread than you could get by trading in the dollar pairs directly. The spread refers to the difference between
the bid and offer, or the price at which you can sell and buy and spreads are
applied in most financial markets.
Crosses enable traders to more
directly target trades to specific individual currencies to take advantage of
news or events. For example, your analysis may suggest that the Japanese yen
has the worst prospects of all the major currencies going forward, based on
interest rates or the economic outlook. To take advantage of this, you’d be
looking to sell JPY, but against which other currency? You consider the USD,
potentially buying USD/JPY (buying USD/selling JPY) but then you conclude that
the USD prospects are not much better than the JPY. Further research on your part
may point to another currency that has a much better outlook (such as high or
rising interest rates or signs of a strengthening economy) say the Australian
dollar (AUD). In this example, you would then be looking to buy the AUD/JPY
cross (buying AUD/selling JPY) to target your view that AUD has the best
prospects among major currencies and the JPY the worst.
Cross trades can be especially
effective when major cross-border mergers and acquisitions (M&A) are
announced. If a UK conglomerate is buying a Canadian utility company, the UK
company is going to need to sell GBP and buy CAD to fund the purchase. The key
to trading on M&A activity is to note the cash portion of the deal. If the
deal is all stock, then you don’t need to exchange currencies to come up with
the foreign cash.
The most actively traded crosses
focus on the three major non-USD currencies (namely EUR, JPY, and GBP) and are
referred to as euro crosses, yen crosses
and sterling crosses. The remaining currencies (CHF, AUD, CAD, and NZD) are
also traded in cross pairs. Tables below highlight the key cross pairs in the
euro, yen, and sterling groupings, respectively, along with their market names.
(Nicknames never quite caught on for the crosses.)
Euro Crosses
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ISO Currency Pair
|
Countries
|
Market Name
|
EUR/CHF
|
Eurozone/Switzerland
|
Euro-Swiss
|
EUR/GBP
|
Eurozone/United
Kingdom
|
Euro-Sterling
|
EUR/CAD
|
Eurozone/Canada
|
Euro-Canada
|
EUR/AUD
|
Eurozone/Australia
|
Euro-Aussie
|
Euro-NZD
|
Euro/New
Zealand
|
Euro-Kiwi
|
Yen Crosses
|
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ISO Currency Pairs
|
Countries
|
Market Name
|
EUR/JPY
|
Eurozone/Japan
|
Euro-Yen
|
GBP/JPY
|
United
Kingdom/Japan
|
Sterling-Yen
|
CHF/JPY
|
Switzeland/Japan
|
Swiss-Yen
|
AUD/JPY
|
Australia/Japan
|
Aussie-Yen
|
NZD/JPY
|
New
Zealand/Japan
|
Kiwi-Yen
|
CAD/JPY
|
Canada/Japan
|
Canada-Yen
|
Sterling Crosses
|
||
ISO Currency Pairs
|
Countries
|
Market Name
|
GBP/CHF
|
United
Kingdom/Switzerland
|
Sterling-Swiss
|
GBP/CAD
|
United
Kingdom/Canada
|
Sterling-Canadian
|
GBP/AUD
|
United
Kingdom/Australia
|
Sterling-Aussie
|
GBP/NZD
|
United
Kingdom/New Zealand
|
Sterling-Kiwi
|
Other Crosses
|
||
ISO Currency Pairs
|
Countries
|
Market Name
|
AUD/CHF
|
Australia/Switzerland
|
Aussie-Swiss
|
AUD/CAD
|
Australia/Canada
|
Aussie-Canada
|
AUD/NZD
|
Australia/New
Zealand
|
Aussie-Kiwi
|
CAD/CHF
|
Canada/Switzerland
|
Canada-Swiss
|
