Cross-currency pairs, also known as crosses, are forex pairs that do not include the US dollar (USD). They represent the exchange rate between two non-USD currencies, such as EUR/GBP, GBP/JPY, or AUD/CHF. Trading cross-currency pairs can provide unique opportunities for diversification, but it also requires a solid understanding of their dynamics. Here’s a guide on how to trade cross-currency pairs effectively.

Understanding Cross-Currency Pairs

Unlike major pairs that involve the USD, cross-currency pairs reflect the economic relationship between two different regions. Their value is often influenced by the relative strength of the two economies, geopolitical events, and global market sentiment. Examples include EUR/GBP (euro vs. pound) and AUD/JPY (Australian dollar vs. Japanese yen).

Key Features of Cross-Currency Pairs

• Higher Volatility: Crosses tend to be more volatile than major pairs because they lack the stabilising influence of the USD.
• Economic Interdependence: The economic and trade ties between the two regions can heavily influence the pair’s movements.
• Liquidity: Some cross-currency pairs, such as EUR/GBP, are highly liquid, while others, like AUD/CHF, may have lower liquidity.

Factors Affecting Cross-Currency Pairs

1. Interest Rate Differentials

The monetary policies of the respective countries’ central banks influence cross-currency pairs. Higher interest rates in one country strengthen its currency, impacting the exchange rate.

2. Economic Performance

Key indicators such as GDP growth, inflation, and employment data from both economies affect the value of cross-currency pairs.

3. Commodity Prices

For commodity-linked currencies like AUD, CAD, and NZD, movements in global commodity prices can drive cross-currency pairs.

4. Risk Sentiment

Risk-on sentiment boosts higher-yielding currencies (like AUD and NZD), while risk-off sentiment strengthens safe-haven currencies (like JPY and CHF).

5. Correlation with Majors

Cross-currency pairs often exhibit indirect relationships with major currency pairs. For instance:

• EUR/GBP can be influenced by EUR/USD and GBP/USD.
• AUD/JPY may correlate with AUD/USD and USD/JPY.

Step-by-Step Guide to Trading Cross-Currency Pairs

1. Understand the Drivers of Both Currencies

• Analyse the economic performance, interest rates, and geopolitical events for both countries.
• Study how these factors interact to influence the exchange rate.

2. Monitor Major Currencies

Although cross-currency pairs exclude the USD, their movements are often indirectly affected by the dollar. For example, if the USD strengthens, it may impact related pairs like EUR/USD and GBP/USD, which in turn influence EUR/GBP.

3. Use Technical Analysis

Technical analysis is crucial for identifying trends and entry/exit points:

• Support and Resistance Levels: Use these to identify potential reversal or breakout zones.
• Indicators: Tools like RSI, MACD, and Bollinger Bands can provide confirmation for trades.
• Trend Lines: Determine the overall direction of the pair to guide your trading decisions.

4. Account for Correlations

Cross-currency pairs often correlate with other pairs or asset classes:

• Positive Correlations: For example, AUD/JPY may move in tandem with risk-sensitive assets like equities.
• Negative Correlations: EUR/GBP may move inversely to GBP/USD.

5. Trade the Strong vs. the Weak

Identify which currency is strengthening and which is weakening. For example:

• If the euro is strengthening while the pound is weakening, EUR/GBP is likely to rise.
• If the yen strengthens due to risk aversion, pairs like GBP/JPY or AUD/JPY may decline.

6. Adjust for Volatility

Crosses can be more volatile than major pairs. Use stop-loss orders and appropriate position sizing to manage risk effectively.

7. Follow Global News

Geopolitical developments, trade relations, and global economic trends can affect cross-currency pairs. Stay informed to anticipate market movements.

Common Challenges with Cross-Currency Pairs

• Higher Spreads: Some crosses have wider spreads than major pairs due to lower liquidity.
• Complex Analysis: Analysing two economies simultaneously can be more challenging than focusing on one major currency.
• Increased Volatility: Crosses can experience sharp and unpredictable price swings.

Practical Tips for Trading Cross-Currency Pairs

1. Focus on Popular Crosses:
   • Start with liquid pairs like EUR/GBP or GBP/JPY, which are easier to trade due to tighter spreads and abundant data.
2. Combine Fundamental and Technical Analysis:
   • Use fundamental analysis to identify long-term trends and technical analysis for precise entry and exit points.
3. Diversify Your Portfolio:
   • Cross-currency pairs can help diversify your trading portfolio, reducing reliance on USD-based trades.
4. Be Aware of Market Sentiment:
   • Monitor risk sentiment, as it heavily influences crosses involving safe-haven and risk-sensitive currencies.
5. Use an Economic Calendar:
   • Track key data releases for both currencies to avoid being caught off guard by market-moving events.

FAQs

What are cross-currency pairs?

Cross-currency pairs are forex pairs that do not include the US dollar, such as EUR/GBP, AUD/JPY, or GBP/CHF.

Why are cross-currency pairs more volatile?

They lack the stabilising influence of the US dollar and are influenced by diverse economic and geopolitical factors.

How do I trade EUR/GBP?

Focus on the economic divergence between the Eurozone and the UK, use technical analysis to identify trends, and monitor key data releases.

What is the best time to trade cross-currency pairs?

The best time to trade depends on the currencies involved. For example, EUR/GBP is most active during the European session.

Do cross-currency pairs have higher spreads?

Yes, some crosses, especially less-traded ones, tend to have wider spreads due to lower liquidity.

How does risk sentiment affect cross-currency pairs?

Risk-on sentiment favours higher-yielding currencies like AUD or NZD, while risk-off sentiment boosts safe-haven currencies like JPY or CHF.

Can I use correlations to trade cross-currency pairs?

Yes, understanding how crosses correlate with major pairs or commodities can help predict movements.

What technical indicators work best for crosses?

RSI, MACD, and moving averages are commonly used to analyse trends and momentum in cross-currency pairs.

Are cross-currency pairs good for beginners?

Some, like EUR/GBP, are suitable due to their lower volatility, but others, like GBP/JPY, can be more challenging for beginners.

How important is news when trading cross-currency pairs?

News events, especially those affecting both currencies, are crucial for trading crosses effectively.

Trading cross-currency pairs offers diversification and unique opportunities. By understanding their drivers, combining fundamental and technical analysis, and managing risk effectively, traders can navigate these dynamic pairs with confidence.