Cross currency pairs on Forex are exchange rates between two non-USD currencies, derived from their rates against the US dollar. They enable portfolio diversification, risk reduction, and unique trading strategies without direct USD involvement.
Contents
- What Are Cross Currency Pairs on Forex
- Types of Cross Currency Pairs
- How to Calculate Cross Rates
- How to Trade Cross Pairs on Forex
- Advantages and Disadvantages of Trading Cross Pairs
What Are Cross Currency Pairs on Forex
Cross rate is the exchange rate between two currencies determined via their rates against a third currency, typically the US dollar. Although USD serves as the base for most calculations, it does not participate in the final cross pair.
Simply put, a cross currency pair excludes the USD.
Types of Cross Currency Pairs
Cross currency pairs can be grouped as follows:
- Crosses with euro;
- With Japanese yen;
- With British pound;
- Commodity crosses (with Australian, New Zealand, and Canadian dollars).
On the interbank Forex market, the highest volumes involve crosses between major currencies: EUR/JPY (euro/Japanese yen), EUR/CHF (euro/Swiss franc), EUR/GBP (euro/British pound). Yen crosses like GBP/JPY and CHF/JPY also see active trading.
Their key feature is lower liquidity than major pairs, leading to unpredictable moves during news releases and wider spreads due to greater gaps between bid and ask prices.
How to Calculate Cross Rates
Forex cross rates are calculated using the quotes of the involved currencies against the USD. The formulas depend on direct or indirect quotes:
For pairs with one direct and one indirect quote:
Cross rate = Direct quote of first currency × Indirect quote of second currency
EUR/JPY = EUR/USD × USD/JPY
Example:
- EUR/USD = 1.10227;
- USD/JPY = 123.565;
- EUR/JPY = 1.10227 × 123.565 = 136.202.
For pairs with two direct or two indirect quotes:
Cross rate = Direct/indirect quote of first currency ÷ Direct/indirect quote of second currency
EUR/GBP = EUR/USD ÷ GBP/USD
How to Trade Cross Pairs on Forex
Analyzing and forecasting cross pairs resembles major pairs but includes specifics:
- First, cross rates are secondary and depend on USD movements, beyond just the economies or monetary policies of the pair’s countries.
- Second, they reveal relative speed changes in major pairs. For instance, USD strength affects EUR/USD and USD/CHF differently; tracking EUR/CHF highlights these divergences easily.
Advantages and Disadvantages of Trading Cross Pairs
Traders favor crosses for their higher volatility, enabling larger profits over the same period compared to majors with proper analysis.
Fundamental data for some pairs is scarce, so traders often rely on technical strategies or pairs involving their home currency for better news access.
Previously, wide spreads made crosses unsuitable for intraday or scalping; most brokers now offer acceptable spreads.
Wide spreads on certain crosses can be turned into profit via:
- Rebate services, where returned spread portions are significant versus majors.
- Using cross analysis for major pairs. If GBP/JPY signals yen weakness against pound, buy GBP/USD and sell USD/JPY instead; one loss is offset by the other’s gain per the cross ratio.
FAQ
What is a cross currency pair?
A cross pair trades two non-USD currencies, calculated from their USD rates, like EUR/JPY from EUR/USD and USD/JPY.
How do you calculate EUR/JPY cross rate?
Multiply EUR/USD by USD/JPY; for example, 1.10227 × 123.565 = 136.202.
Why trade cross pairs over majors?
They provide higher volatility for bigger profits, portfolio diversification, and insights into relative currency strengths without USD interference.
