Trade Interest Rate Differentials
Naturally, some countries have a higher interest rate, and some have lower ones. There is a term called “interest rate differential,” also known as the “carry trade.” Together with price appreciation, you might have a good chance at taking home profits and gains.
Currency crosses and high-interest rate differentials
Now, we also have currency pairs that we call currency crosses. Before, if a person wants to exchange their local currency for another, they will need to exchange them first for US Dollars. Only then can they exchange that USD value for the preferred currency. For instance, I want to exchange my Euro for Japanese Yen; then I would have to exchange my Euro first for the US Dollar then exchange those US Dollars for Japanese Yen. Currency crosses bypass this exchange to USD. Some of the most famous examples include EUR/JPY, EUR/GBP, EUR/CHF, and GBP/JPY. Currency crosses have a variety of pairs that has high-interest rate differentials. They are essential for carry trades or interest rate differential.
Obscure currency crosses
We have named some popular currency crosses earlier, but there are way more than what we usually use and see. Other existing currency crosses do not have the USD, EUR, or JPY even when they are the most liquid ones. We can call these “obscures.” As their name suggests, generally, obscure means unknown, unclear, or uncertain. Some examples include unusual combinations like AUD/CHF, GBP/CHF, CAD/CHF, or AUD/NZD.
Liquid and illiquid currency crosses
Most traders will usually choose the most popular currency crosses since, of course, they are the most liquid ones. However, some love to experiment and take risks. Unlike the Euro or the Japanese Yen, we say risky because these obscure ones do not have as much liquidity. As a result, fewer people would like to trade them, making the transaction volume lesser. Since they tend to be illiquid, it would make sense that the prices are volatile, and whipsaw stop-outs must be expected already. There is one more notable downside when trading these obscure ones: the spreads can be wide!
Currency crosses and fundamentals
Looking at data and events, you saw compelling data about Switzerland that makes you want to buy CHF/ USD. But what happens if there is also strong data from the US? CHF/USD would then be a flat currency pair. Matching a weak currency with a robust currency is one thing and using currency crosses is another. Be updated about the incoming events in the economic calendar that you chose. A wise forex trader knows how to take advantage of opportunities such as currency crosses where you can match weak and robust currencies without using the USD.
Let’s wrap it up here.
We have tackled at least three tips for you today when using currency crosses. Let’s summarize!
- Combining interest rate differential and price appreciation give you a chance at profits.
- Obscure currency crosses are illiquid, so extreme price swings and wide spreads are always expected.
- Fundamental analysis can help in mixing and matching currencies aside from the USD.
