Why You Should Trade Forex Crosses
12/12/2012 9:00 am EST
Many forex traders focus on trading the major currency pairs (pairs not involving the US dollar), but Jeremy Wagner of DailyFX Education shares the benefits of trading cross pairs.
Most forex research and forex trading volume circles around the US dollar. Limiting your research and forex analysis to just the USD pairs also limits your realm of possible trading opportunities. Here are two benefits one can realize while considering the forex cross pairs.
Two Advantages of Trading Cross Pairs:
- Stronger trends can develop in cross pairs versus majors
- Insulate your trades from US news releases
Which currency pair has moved the most since January 1, 2010? Answer: EUR-NZD, which has moved down about 4,100 pips.
Benefit of Trading Crosses – Strong Trends
In fact, the next strongest trends since January 2010 are all cross pairs (EUR-AUD, GBP-NZD, and EUR-JPY). You would think by listening to the news media about the weak US dollar that it would be in one of the strongest down trends, but clearly it is not.
Strong trends such as the above are generally created by diverging interest rate expectations. In the case above, the sovereign debt crisis has been taking a toll on the EUR as various parts of the region have been experiencing bank runs. On the other hand, the New Zealand economy has been holding up, which has kept their central bank’s target rate relatively high. Therefore, an investor selling euro to hold kiwi’s gets paid a daily interest rate to hold the trade open overnight.
You can see how much the currency pays by checking the dealing rates window of the FXCM Marketscope charts. In the example above, holding a 10k sell position at 5pm ET pays $0.60.
Insulate from US Dollar Moves
The second benefit becomes particularly important during weeks of heavy fundamental news announcements.
This current week was especially heavy with five central banks releasing their latest change (if any) to their benchmark interest rate. Then, to finish up the week, Friday morning was the announcement of the jobs report through the US Non-Farm Payroll figure.
Needless to say, this produces a lot of potentially market moving event risk on the calendar and trading cross pairs can help insulate our trades of US news releases.
Although it is possible the cross pairs can make a strong move, if you want to be exposed to the market but not have to pick a direction of the US dollar, then a cross pair is your answer.
Benefits of Trading Crosses – Insulate from US Dollar
Let’s assume, for a moment, that you want to trade EUR to the downside because you think the pair is overbought. In lieu of trading the EUR-USD, look for technical set ups in other cross pairs like EUR-GBP (see above), EUR-JPY or EUR-NZD.
These three pairs were showing technical set ups earlier in the week where the trader would not have to be exposed to the US dollar and its trends.
By Jeremy Wagner, Head Trading Instructor, DailyFX Education