Currency Cross Rates Open Up Great Opportunities

All About Cross-Currency Pairs

 

Let’s dive into the concept of a cross-currency pair, also known as a currency cross or simply a cross. This term refers to a currency pair that excludes the US dollar.

 

Historically, converting one currency into another required first exchanging it into US dollars and then converting those dollars into the desired currency.

 

Cross-Currency Pairs: What Are They?

 

For example, to exchange British pounds for Japanese yen, you’d first need to exchange pounds for US dollars and then convert those dollars into yen.

 

With the advent of cross-currency pairs, it became possible to bypass the US dollar entirely and directly exchange one currency for another. Examples of cross-currency pairs include GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.

How Cross-Currency Rates Are Calculated

 

Note: This may get a bit technical if you’re not a numbers enthusiast. Don’t worry—modern trading platforms handle all the calculations for you.

 

But if you’re curious about how it works, here’s a quick explanation. It’s always helpful to understand the basics, right? Let’s calculate the bid price (buy price) and the ask price (sell price) for a cross-currency pair.

 

Imagine we want to determine the bid and ask prices for the GBP/JPY pair. First, find the bid and ask prices for GBP/USD and USD/JPY.

 

Why these pairs?

 

Because they both involve the US dollar as a common denominator. These pairs are often referred to as the “legs” of the GBP/JPY pair since they both include the USD.

 

Suppose you know the following bid/ask prices:

•GBP/USD: 1.5630 (bid) / 1.5635 (ask)

•USD/JPY: 89.38 (bid) / 89.43 (ask)

Calculating the Bid and Ask for GBP/JPY

 

To calculate the bid price for GBP/JPY:

1.Multiply the bid prices of GBP/USD and USD/JPY:

1.5630 × 89.38 = 139.70

 

Great! That’s your bid price.

 

To calculate the ask price for GBP/JPY:

1.Multiply the ask prices of GBP/USD and USD/JPY:

1.5635 × 89.43 = 139.82

 

Simple, right? With this, you’ve just calculated the cross-rate for GBP/JPY.

Why Cross-Currency Pairs Are Important

 

More than 90% of transactions on the Forex market involve the US dollar, as it is the world’s dominant currency. Most commodities, like oil and agricultural products, are priced in USD. Countries must first convert their currency into dollars to purchase these goods.

 

Many nations, including China, Japan, and Australia, hold massive reserves of US dollars in their central banks to facilitate quicker transactions. For instance, China’s dollar reserves are estimated at around $1 trillion!

How This Affects Forex Trading

 

Because most currencies are tied to the US dollar, trading often boils down to one key question:

“Is the US dollar strong or weak today?”

 

This reliance on the dollar influences major currency pairs like:

•Major Pairs: GBP/USD, EUR/USD, USD/JPY, USD/CHF

•Commodity Pairs: AUD/USD, USD/CAD, NZD/USD

 

When trading these pairs, you’re essentially speculating for or against the US dollar.

The Advantages of Trading Cross-Currency Pairs

 

Trading cross-currency pairs removes the dependency on the US dollar, offering more diverse opportunities for traders.

 

For instance, if USD pairs are moving sideways, cross-currency pairs like EUR/GBP or AUD/JPY may be trending strongly, presenting excellent opportunities for profit.

Examples of Popular Cross-Currency Pairs

1.EUR/JPY (Euro/Yen): A favorite for avoiding US dollar volatility and focusing on European and Japanese economic developments.

2.EUR/GBP (Euro/Pound): Great for tracking the dynamic between Europe and the UK.

3.AUD/JPY (Australian Dollar/Yen): Ideal for trading during the Asian session.

Key Takeaways

 

Cross-currency pairs offer traders a chance to:

•Diversify their portfolio.

•Avoid over-reliance on the US dollar.

•Find opportunities in unique market conditions.

Ready to Expand Your Trading Skills?

 

Take the next step in mastering cross-currency trading with Ronin Academy! Learn how to spot opportunities in Forex, crypto, and other markets while building a strategy that works for you. Start today and trade smarter, not harder!