Cross pairs represent entirely
new sets of routinely fluctuating currency pairs that offer another universe of
trading opportunities beyond the primary, USD pairs. Developments in the
currency market are not always a simple bet on what‘s happening to the U.S.
dollar. Crosses are the other half of the story, and their significance appears
to be increasing dramatically as a result of electronic trading. Years ago, if you
wanted a price in a cross pair, a human would have to push the buttons on a
calculator to come up with the cross quote. Today’s streaming price technology
means that cross rates are as fluid as the dollar pairs, making them as
accessible and tradable as USD/JPY or EUR/USD.
In particular, cross trading
offers the following advantages:
- You can pinpoint trade opportunities based on news or fundamentals. If negative Japanese news or data is released, you may be looking to sell the JPY. But against what? If the USD is currently weakening, buying USD and selling JPY may not yield any results. Selling JPY against another currency with better immediate prospects (such as buying EUR/JPY or AUD/JPY) may yield a more appreciable return.
- You can take advantage of interest-rate differentials. Selling low-yielding currencies against higher-yielding currencies is known as a carry trade. Carry trades seek to profit from both interest-rate differentials and spot price appreciation, and can form the basis of significant trends.
- You can exploit technical trading opportunities. The majors may be range bound or showing no actionable technical signals, but a cross rate may be set to stage a directional price breakout. Survey charts of cross rates to spot additional technical trading setups.
- You can expand the horizon of trading opportunities. Instead of looking at only four to seven dollar pairs, cross rates offer another dozen currency pairs that you can look to for trading opportunities.
- You can go with the flow. Speculative flows are ever-present in the currency market, but they don’t always involve the dollar pairs. Today's speculative flow may be focused on the JPY crosses or selling CAD across the board on the back of surprisingly weak CAD data. The more attuned you are to cross-currency pairs, the more likely you are to identify and capitalize on the speculative move du jour.
