Apart from major currency pairs that include the U.S. dollar, there are cross currency pairs that omit it. When trading majors, USD movement appears to be the cardinal problem, while analysis of the quoted currency (EUR – the euro, JPY – the Japanese yen, CHF – the Swiss franc, GBP – the British pound) submerges.
In trading crosses, a currency is valued not in the U.S. dollars but in the quoted currency. The quotes of such pairs are called cross rates. EUR/CHF, EUR/GBP, and EUR/AUD are the most traded crosses. They are characterized by higher liquidity. However, sometimes EUR/CHF is more liquid than USD/CHF (due to institutional players who want to trade the Swiss franc). Another popular cross currency group includes the yen: CAD/JPY, NZD/JPY, and GBP/JPY. This group is in great demand among investors and traders as it enables carry trading.
Carry trade operations presuppose borrowing a low-yielding currency (the yen, for instance) and then lending a high-yielding currency, which makes it possible to get the interest rates differential. Canada, New Zealand, and the UK have the highest interest rates, that is why their national currencies are so popular in carry trading.
When trading majors, USD and the quoted currencies may happen to be of the same value. Here, it is hard to make a decision as you do not know whether the dollar would go up or down. Thus, if an economiс recovery is observed in the USA or euro area, it is even more difficult to decide, whether to go long or short.
The opportune moment for trading EUR/JPY is when the yen is pressured by the geopolitical threat from North Korea.
Let us consider the most popular crosses:
EUR/CHF: The euro area is the main trading partner of Switzerland. The Swiss franc has a relatively low interest rate, that is why the currency is widely used in carry trading. The pair shows quite a good trend dynamics since 2006. Since 2011, the Swiss franc rate has been capped at 1.2000 per euro (the quote cannot fall below this mark as the SNB controls the rate).
EUR/JPY: It is a very popular cross currency pair as it is closely related to USD/JPY and EUR/USD. Traders benefit from its movement taking into account the difference in interest rates and growth patterns of Japan and euro area.
NZD/JPY: It is favored by carry traders as it has the highest interest rate differential. NZD/JPY is great for long positions, in particular if general fundamental and technical indicators are advantageous for the growth.
EUR/GBP: The euro area is one of the main UK's partners. Thus, if trading is carried out in respect of fundamental factors of Great Britain and the pound, then trading EUR/GBP will be the right decision.
CAD/JPY: The ability to project oil price movements can be applied on Forex with the help of this cross currency pair. Canada ranks second in world's oil reserves and is considered to be a net exporter gaining profit from higher prices for oil. Japan, an oil major importer, suffers losses, on the contrary. Thus, if the market expects oil prices rally, it is high time to open longs on this cross currency pair.
Trading crosses, it is possible to open carry trade positions and make use of the economic data from both countries. Every cross currency pair has its features, interest rate differentials, and depends on various political and economic events which set the trend direction.