What Is A Cross Currency?

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Cross currency pairs are currency pairs that don’t include the U.S. dollar but include at least one of the other three major currencies. As global economies become more interconnected and the reliance on the U.S. dollar decreases, traders are considering a wider range of currency pairs that don’t involve the dollar.

Cross currency pairs allow the Forex market to exchange currencies without using the U.S. dollar as a settlement currency. In this article, I explain what cross currency pairs are, the benefits and challenges of trading them, how to calculate their exchange rates, and strategies for trading them.

Risk warning: Forex trading carries high risks, with potential losses including your entire deposit. Market fluctuations, economic instability, and geopolitical factors impact outcomes. Studies show that 70-80% of traders lose money. Consult a financial advisor before trading.

What is a cross currency pair?

A cross currency pair is a Forex trading pair that doesn’t involve the U.S. dollar. Traditionally, currency exchanges relied on the dollar for settlement, meaning non-U.S. currencies were first converted to dollars. Today, the Forex market allows direct exchanges between currencies, which improves market efficiency and expands trading options.

Cross currency pairs include any combination of major or minor currencies that do not involve the U.S. dollar. Thus, all minor pairs are cross currency pairs, and some exotic pairs are too if they exclude the U.S. dollar. Cross currency pairs enable traders to diversify their portfolios and explore opportunities outside the influence of the U.S. dollar, which can be particularly advantageous during periods of USD volatility.

Key features of cross currency pairs
Feature	Description
Exclusion of USD	Consist of two currencies excluding the U.S. dollar. Examples: EUR/GBP, EUR/JPY, GBP/JPY
Volatility and liquidity	More volatile and generally lower liquidity compared to major pairs
Trading opportunities	Provide diversification and potential arbitrage opportunities
Spread costs	Higher spreads due to lower liquidity and higher volatility, leading to higher transaction costs
Correlation with majors	Indirectly influenced by movements in major pairs involving USD
Economic Indicators	Affected by economic data, interest rates, and political events of the countries involved
Analysis	Requires both technical and fundamental analysis focusing on the economic conditions of involved countries

All types of currency pairs in Forex

Major pairs. These pairs include the U.S. dollar and another major currency, such as EUR/USD or USD/JPY. Major pairs are the most traded, offering high liquidity and lower transaction costs.
Minor pairs. These pairs consist of two major currencies but exclude the U.S. dollar, like EUR/GBP or AUD/JPY. While less liquid than major pairs, minor pairs offer significant trading opportunities due to their volatility and larger price movements.
Exotic pairs. Exotic pairs combine a major currency with one from an emerging or smaller economy, such as USD/TRY or EUR/TRY. These pairs are often highly volatile and have higher transaction costs, reflecting the increased risk and lower liquidity.

Comparison of technical parameters of the main pair and its cross-assets

Below is a comparison table where we have highlighted key features and offerings of top brokers for trading cross currency and major pairs.

Comparison table of the best brokers
	Trading.com USA	ZForex	Plus500	OANDA	FOREX.com
Currency pairs	69	50	60	68	80
Demo account
Min. deposit, $	50	10	100		100
Max. leverage	1:50	1:1000	1:300	1:200	1:50
Min Spread EUR/USD, pips	0.9	0.1	0.5	0.1	0.7
Max Spread EUR/USD, pips		0.4	0.9	0.5	1.2
Open account	Go to broker Your capital is at risk.	Go to broker Your capital is at risk.	Go to broker 80% of retail CFD accounts lose money.	Go to broker Your capital is at risk.	Study review

Advantages and challenges of trading cross currencies

The U.S. dollar is the world’s reserve currency and the most traded, so pairs involving USD have more liquidity and stability compared to cross currency pairs. The six most traded currency pairs all include the U.S. dollar. However, cross currency pairs have their own advantages and disadvantages:

Diversification. Allows you to diversify your portfolio and trade different economies without involving the U.S. dollar.
Reduced dependency on USD. Useful when the USD is weak or you want to avoid U.S. economic influences.
Wider economic insights. Trading cross currencies helps you understand global economic conditions, enhancing your overall market knowledge.
Specialized trading strategies. Unique opportunities and trends with cross currency pairs enable specialized strategies.

Less liquidity. Lower liquidity compared to major pairs, leading to wider bid-ask spreads and higher trading costs.
Higher volatility. Greater price swings can present trading opportunities but also increase the risk of sudden losses.
Limited information. Most financial news focuses on the U.S., making it harder to find timely information on cross currency pairs.

How to calculate the exchange rate for a cross currency pair?

To calculate the exchange rate for a cross currency pair, you use the exchange rates of each currency against a common third currency, often the U.S. dollar (USD). This process helps you find the rate between two currencies not directly quoted against each other.

Step-by-step calculation:

Identify the currency pairs:
- Determine the two currency pairs that involve a common third currency (usually USD). For instance, if calculating EUR/JPY, you need the EUR/USD and USD/JPY rates.
Obtain the exchange rates:
- Find the exchange rates for the relevant currency pairs. For example:
  - EUR/USD = 1.2000
  - USD/JPY = 110.00
Calculate the cross rate:
- Multiply the two exchange rates:
  - EUR/JPY = EUR/USD * USD/JPY
  - EUR/JPY = 1.2000 * 110.00
  - EUR/JPY = 132.00
Inverse calculation:
- If currency pairs are quoted inversely (e.g., USD/EUR instead of EUR/USD), take the reciprocal of one rate. If USD/EUR = 0.8333, then EUR/USD = 1 / 0.8333 ≈ 1.2000.

Trading strategies for cross currency pairs

Below is a table presenting various trading strategies for cross currency pairs, along with explanations and examples.

Trading strategies for cross currency pairs
Strategy	Concept	Execution	Example
Carry Trade Strategy	Profiting from interest rate differentials between two currencies	Identify pairs with significant interest rate differences. Go long on the currency with the higher interest rate and short on the lower one. Monitor for currency depreciation	Going long on AUD/JPY to earn the interest rate differential, but monitoring for potential depreciation in the AUD
Trend Following Strategy	Trading in the direction of the prevailing market trend	Use indicators like moving averages and MACD to identify trends. Enter long positions in uptrends and short positions in downtrends. Place stop-loss orders accordingly	Using moving averages to identify an uptrend in EUR/JPY and entering a long position during the uptrend
Range Trading Strategy	Buying at the low end and selling at the high end of a price range	Use support and resistance levels to define the trading range. Enter long at support and short at resistance. Exit positions at the opposite boundary. Confirm entries with oscillators	Trading within a defined range between 120 and 125 in EUR/GBP, buying at 120 and selling at 125
Breakout Strategy	Entering trades when the price breaks out of a defined range	Identify key support and resistance levels. Place buy orders above resistance and sell orders below support. Use volatility indicators to spot potential breakouts. Confirm with volume or momentum indicators	Entering a buy position when GBP/CHF breaks above a significant resistance level with increased volume
News Trading Strategy	Trading based on economic news releases and events	Monitor an economic calendar for news impacting the currencies. Enter positions before or after the news release. Use tight stop-loss orders to manage volatility risk	Trading GBP/JPY around Bank of England interest rate decisions based on expected impact
Arbitrage Strategy	Taking advantage of price discrepancies between different markets or instruments	Identify price differences between the same currency pairs on different platforms. Execute simultaneous buy and sell orders to capture the price difference. Requires fast execution and low transaction costs	Arbitraging price differences in EUR/USD between two Forex brokers
Mean Reversion Strategy	Assuming that prices will revert to their historical average over time	Identify overbought and oversold conditions using indicators like RSI or Bollinger Bands. Enter trades expecting prices to revert to the mean. Set stop-loss orders to protect against prolonged trends	Entering a short position in NZD/CAD when RSI indicates overbought conditions

Diversification benefits of cross currency trading

I've found cross currency trading to be an invaluable part of my trading strategy. Unlike major currency pairs that always involve the U.S. Dollar, cross currency pairs offer unique opportunities to capitalize on the price movements between two non-USD currencies.

One of the key benefits of trading cross currency pairs is the diversification they provide. For instance, pairs like EUR/GBP or AUD/JPY often move independently of the USD, driven by regional economic factors and geopolitical events. This allows for a broader range of trading opportunities and can reduce the risk associated with a portfolio heavily reliant on USD movements.

In my personal experience, trading crosses has also enhanced my market analysis skills. Understanding the economic indicators and news events specific to each currency's region is crucial. For example, trading the EUR/GBP pair requires staying updated on both Eurozone and UK economic data. This deeper level of analysis not only improves trading outcomes but also provides a more comprehensive understanding of global markets.

However, it's important to note that trading cross currency pairs also comes with challenges. Some crosses' liquidity can be lower than major pairs, leading to wider spreads and potential slippage. Additionally, the need for thorough research and analysis can be time-consuming.

Conclusion

In conclusion, understanding cross currency pairs is essential for any forex trader seeking to diversify beyond major pairs like EUR/USD or USD/JPY. Cross currencies, such as EUR/GBP or AUD/JPY, offer unique trading opportunities and can help traders capitalize on price movements unrelated to the US dollar. While trading these pairs may involve different volatility and liquidity considerations, they also provide avenues for strategic portfolio diversification. Ultimately, mastering cross currency trading can give you an edge in the global forex market, reminding us that seizing opportunities often means looking beyond the obvious.

FAQs

How are cross currency pair exchange rates typically calculated in the Forex market?

Cross currency pair exchange rates are usually calculated using the rates of each currency against a common third currency, often the US dollar. Traders multiply or divide the exchange rates of the two currencies with the third currency to derive the cross rate when a direct quote is unavailable.

What unique trading strategies are commonly used for cross currency pairs?

Popular strategies for cross currency pairs include carry trade (profiting from interest rate differentials), trend following, range trading, breakout strategies, news trading, arbitrage, and mean reversion. Each strategy can be adapted to take advantage of the specific volatility, liquidity, and regional factors influencing cross currency pairs.

Why might traders choose to focus on cross currency pairs instead of major pairs?

Traders often focus on cross currency pairs to diversify their portfolios, reduce reliance on the US dollar, and explore trading opportunities arising from regional economic trends and political events. These pairs can move independently of the dollar, providing exposure to broader market dynamics.

What are the main risks associated with trading cross currency pairs?

The main risks of trading cross currency pairs include lower liquidity, leading to wider bid-ask spreads and higher transaction costs, as well as increased volatility compared to major pairs. In addition, limited availability of timely market information can make analysis and timely trading decisions more challenging.

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Team that worked on the article

Parshwa is a content expert and finance professional possessing deep knowledge of stock and options trading, technical and fundamental analysis, and equity research. As a Chartered Accountant Finalist, Parshwa also has expertise in Forex, crypto trading, and personal taxation.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets.

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