Cross rate of exchange in the market
What is the cross rate of exchange at ?
Cross Course - the ratio of the exchange rates of two currencies, which is determined on the basis of their exchange rate to a third currency. Since all currencies are quoted against the U.S. dollar, the third currency is the U.S. dollar. On the foreign exchange market the concept of cross rate characterizes currency pairs without the USD.
What kind of cross courses are there on ?
Currency cross rates can be divided into the following groups
- cross rates with the euro;
- cross rates with the yen
- cross rates with the pound sterling;
- Commodity cross rates (with the Australian, New Zealand and Canadian dollar).
Cross rates between the major hard currencies: EUR/JPY, EUR/CHF, EUR/GBP have the highest trading volumes on the interbank foreign exchange market Forex. GBP/JPY and CHF/JPY are also sometimes actively traded.
How is the cross rate of currencies calculated on ?
Cross rates are calculated through the basic exchange rates to the dollar (the exception is the currency pair EUR/GBP).
For example, the formula for the cross rate EUR/JPY is as follows:
In numbers, this is as follows:
- EUR/USD = 1.10227 (the current euro/dollar pair rate);
- USD/JPY = 123.565 (the current dollar/yen exchange rate);
- EUR/JPY = 1.10227 x 123.565 = 136.202 (the current euro/yen cross rate).
How to trade cross rates on ?
The analysis and forecasting of cross rates of currencies is almost no different from the analysis of major currency pairs, but have a number of features.
- First, we must remember that the cross rate is a secondary indicator and, in one way or another, depends on the dollar rate at , not only on the state of the economy and monetary policy Central Banks of the respective countries.
- Secondly, the analysis of the dynamics of cross-currency rates reveals the speed of changes in the rates of the major currency pairs. For example, when the dollar strengthens, the speed of movement of currency pairs EUR/USD and USD/CHF will be different. Observing these currency pairs separately it is very difficult to see the difference in speeds, but the analysis of the cross rate of EUR/USD to CHF EUR/CHF allows you to easily discern it.
Advantages and disadvantages of cross currency trading
Constant interest in the cross rates of currencies is due to their increased volatility. Correct analysis of cross rate dynamics allows you to get a profit that exceeds the profit when trading on the major currency pairs for the same period of time.
Until recently, trading cross rates had a fairly significant drawback - too large spread, which made cross rates unsuitable for use in some trading strategies (intraday, scalping, etc.). However, nowadays most brokers have sufficiently acceptable spreads for cross rates.
The lack of a large spread on some cross rates can be used to make a profit in trading. This can be done in two ways:
- First way
Using a rebate service where a portion of the returned spread will be quite tangible compared to the major currency pairs.
- The second way
Using cross rate analysis to trade on major currency pairs.
For example, the cross rate analysis of GBP/JPY implies its further growth, that is, the yen will weaken against the pound. Instead of a long position on the GBP/JPY cross rate, it is possible to open two positions on these currencies against the dollar, that is, to buy the pound and sell the yen. Even if one deal turns out to be a loss, the profit on the second deal will cover it, according to the ratio of the cross rate.
How to predict the dynamics of currency pairs
- Fundamental analysis in simple words
- Models of fundamental analysis and prediction of exchange rates in FOREX