More options with currency crosses
Because
the dollar is not present in currency crosses, they are also much less
influenced by 'the delusion of the day' of the Forex, which so often influences
the majors (5 main currency pairs) and commodities such as gold and oil.
Currency
crosses are much less affected by the type of volatility that comes with news
about the dollar purer trading signals, which can be used for trend trading and
range trading.
For
traders who make extensive use of technical analysis, trading in currency
crosses is often a relief.
See for
example the following forex charts (1 hour candles) of the EUR / USD and the
CAD / JPY. After a few days of wiping back and forth, the course suddenly
rises, after which it collapses again. The CAD / JPY for the same period looks
much clearer, fewer peaks, more trend. On that graph the trading signals are
clearer and stop-outs less frequent.
Carry Trade
The most interesting thing about currency crosses is that different
crosses are influenced by different factors, while the majors are all
influenced by the same factor, namely the dollar.
Take, for example, the forex strategy carry trade. With the carry trade
the Forex trader benefits from the interest difference between two currencies.
Put simply, the currency trader 'sells' the currency with the low interest rate
and 'buys' the currency with the high interest rate. He puts the interest
difference in his pocket. The forex carry trade is very popular because the
interest rate differences can be huge.
Traditionally, the largest interest rates are to be found in currency
pairs of which the Japanese Yen is a part. This is because the Japanese economy
as an export economy benefits from a weak currency. The Japanese government
itself is therefore actively pursuing policies to keep the currency weak -o.a.
by keeping interest rates low (in February 2010 the interest rate is 0.10%).
Currencies that often have high interest rates are the Australian Dollar, the
New Zealand Dollar, the British Pound and the Euro. (During the economic crisis
of 2008-2009, all central banks drastically reduced their interest rates to
facilitate credit flows, but in normal times the central banks of the
above-mentioned currencies often keep interest rates high). The carry trade can
be very profitable (price gain + interest earnings) but is therefore almost
always with one of the currency crosses.
Benefiting from changing conditions
Currency pairs express the (economic) differences between the countries
in which the counterparty currencies belong. The economy of a country (or
region in the case of the Euro) can be influenced by various factors.
Elections, climate, economic strength etc. Currency crosses lend themselves
perfectly to taking advantage of changes that affect one country more than
another, without the risk of dollar pollution.
Suppose, for example, that both the European Central Bank and the Bank of
England announce their interest rate decision on the same day (whether or not
they increase / decrease interest rates). For both parties, the interest rate
is expected to remain the same, but surprisingly, the ECB has decided to raise
interest rates by 0.25%. You can now go long on the EUR / USD (currency pair
Euro / dollar buy), but the effect of the interest rate increase is probably
stronger at the EUR / GBP, because the British have just made known NOT to
increase. In addition, if figures on the US economy are released later in the
day, this may well affect the effect of the interest rate increase on the EUR /
USD, which is not the case with currency cross EUR / GBP, where the dollar has
no party.
Conclusion
The trading of currency crosses is less suitable for forex beginners, but
can be very profitable for more experienced traders. The two biggest advantages
are that currency crosses 1) offer an escape opportunity to the volatility that
the news about the US economy / dollar entails and 2) open the way to much more
profitable trades. A forex strategy aimed, for example, at a variant of
break-out trading strategy can be applied more often successfully if the
important currency crosses can also participate. The essence of successful
trading on the currency market is the opposition to weak currencies and strong
currencies. After all, this creates the greatest chance of a rational course of
movement. In that light, the inclusion of the currency crosses opens up a whole
new world of possibilities.
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