Cross pairs can be described as those currency pairs which do not include the US dollar. The reason why they are categorised in their own group is that, not long ago, all non-US dollar currency transactions would have required an exchange in to US dollars before being converted in to the required currency. Due to the fact that most governments have large US dollar reserves the way that commodities are priced in US dollars has led to it becoming the naturally dominant global currency. This meant that a transaction such as converting sterling in to Japanese Yen would have required the sterling to be converted in to US dollars and then in to Japanese yen and effectively two transactions for one conversion. The arrival of cross pairs, however, means that the less popular currencies can be traded directly against each other and offer some interesting advantages.
Advantage 1: Trading during volatile markets
The first advantage to trading non-US Dollar currencies is that traders can avoid a number of key dollar-sensitive events, or at least limit their exposure. One example of this is the high risk of trading during the non-farm payroll announcements, either immediately before during or after. This announcement hits the forex markets on the first Friday of each month and can cause wild swings and volatility in the major currency pairs (those which directly trade with the US dollar). Since almost all currency markets are affected by this event, the cross pairs offer a more conservative way to trade these events whilst hopefully avoiding the extreme volatility that is often experienced on the US dollar pairings.
Advantage 2: Cross pairs offer increased trading opportunities
An additional advantage to trading cross pairs is that these markets can lead to greater opportunities for profitable trades. Whilst the major currency pairs will move with and against one another as the strength of the US dollar rises and falls, the cross pairs allow new price movements in the markets as they are not forced to follow the US dollar. This means that there is a high potential for different set-ups on these lower-liquidity markets and the moves can often be large and highly rewarding for those traders wanting to look for trading opportunities elsewhere. Since the majority of forex traders will be looking towards the major currency pairs to identify their trading setups, cross pairs offer an excellent alternative when US dollar pairings fail to produce any significant trades.
Advantage 3: Higher interest rates and carry trades
One final advantage of cross pair trading is the ‘carry trade’ where traders can take advantage of the higher interest rates provided by these currencies. As a long term strategy, traders hold a currency for a long period in order to both make the gains as its value increases but also to be rewarded with the higher interest rates. A recent example of this was the Australian dollar which maintained interest rates above 4%, increasing the demand and value of the currency whilst earning those who had large enough holdings a good baseline return on their trade.
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