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Part III. Crosses – Continuation of Continuation... and Finish

Crosses – Continuation of Continuation... and Finish - Forex School
Most tradeable crosses 

Commander in Pips: Today we will start the conversation about the most popular crosses that are based on the JPY and EUR. These currencies stand next after USD in a row of greatest trading volumes. Besides, as we’ve said in the statistical part. the EUR is the second reserve currency and the Yen is the third one. So, liquidity is rather solid with these currencies also.

The most popular EUR pairs are EUR/JPY, EUR/GBP and EUR/CHF. News releases or macro data from Switzerland or the EU – in other worlds, those, that could influence on EUR and CHF will be more sensitive to EUR crosses rather than on EUR/USD and USD/CHF pairs. UK news or macro data, in turn, could be solidly impact on the EUR/GBP pair.

The most popular EUR pairs are EUR/JPY, EUR/GBP and EUR/CHF. - Forex School

Commander in Pips:
 Since the US economy is the largest in the world, any news and macro data from there will definitely make an impact on GBP/USD and USD/CHF pairs – they will touch EUR crosses as well, but maybe not as hard as USD pairs.

Still there is such opinion on the market that if, for example, US data releases quite positive, this leads EUR/GBP and EUR/CHF turn up. EUR/GBP turns down since GBP/USD turns down, hence in EUR/GBP pound becomes weaker and EUR/GBP starts to rise. The same is with EUR/CHF – USD/CHF goes higher, so investors start to sell francs and that leads EUR/CHF to increase. But I do not quite agree with that.

Pipruit: Why not?​

Commander in Pips: Well, sometimes this is really so. But think by yourself – if investors start to sell CHF in USD/CHF pair, why they should hold EUR in EUR/USD pair? I suppose that they will sell EUR as well, so the dynamic of EUR/CHF pair becomes not so obvious. It will more depend on the impact strength of USD appreciation on the EU economy and the Swiss economy. In other words, it could turn out that the market will remain in some range and just goes nowhere.

Pipruit: I see.​

Commander in Pips: Now about the Yen. Yen is so popular, that its crosses trade to all other major currencies – AUD, EUR, GBP, NZD and some others. First of all, many traders and institutional investors choose yen, since its application is very profitable in terms of carry trade. Since AUD, NZD and GBP historically show rather high interest rates – they guarantee the highest rate difference with yen, i.e. highest level of carry trade. From that perspective AUD/JPY, NZD/JPY and GBP/JPY are very interesting.

But you always have to keep an eye on USD/JPY, even if you deal with JPY crosses. Since USD/JPY is a major pair – some solid events there could and will have impact on price action of crosses. For instance, this could be breakout of some significant level. As you understand JPY has a dominate role here – if USD/JPY breaks solid support – then investors are buying yen and crosses also could move lower, if resistance – then they are selling it, and crosses probably will start to drift higher.

And there is a separate talk about CAD/JPY pair. It has become popular not so far and now is only increasing its popularity. Why? This is comes from a specific Canadian role. In fact Canada has solid oil reserves (13.21% of total world reserves - second place in the world after Saudi Arabia), while Japan's economy based on 99% import of oil, since they have no natural reserves. That’s why CAD/JPY has very high correlation with oil prices – around 80-85%.

Crosses as majors analysis tool

Commander in Pips: So we’ve spoken many times that it is better to focus on major pairs first, or even to stick with just single pair and not spread attention much between all pairs. Still, even if you do not plan to trade crosses, you may use them. Sometimes crosses could shed light on where some major pair could go.

As you know, many major pairs move in same direction, but with different degree. For instance EUR/USD and GBP/USD – correlation between them is solid and very often they react on some news (especially from US) in the same direction. Let’s assume that you want to enter Long, but could decide what pair to choose, since both of them move higher.

In this case EUR/GBP is your clue. If EUR/GBP moves higher or your analysis tells that it should go higher, then EUR is looks stronger than GBP, and, hence EUR/USD will show greater appreciation, compared to GBP/USD. The same is true for down move and for other currencies.

Still, as we said – this is mostly applicable to USD-contained pairs and all will narrow down to your view on the USD – how strong or weak it is. So, if you have a bearish view on USD – you may act in any major pair – EUR, GBP, AUD, NZD, CHF and JPY, but which one to choose to make a parlay on USD weaken – crosses could help us. For example, if you think between USD/JPY and USD/CHF – look and CHF/JPY and so on.

Crosses on majors impact

Pipruit: Well, this is really interesting, Sir. But could crosses somehow have influence on majors?​

Commander in Pips: Yes, this is possible, but mostly due to technical reasons and speculations. It’s better to explain by example. Let’s assume that Fed announces an unexpected rate hike, and the dollar is starting to skyrocket – everybody start to buy USD

Crosses on majors impact continued

You make analysis of GBP/USD end also open short position with it, since USD starts to increase in value. When finally, rally is over you enjoy with 150+pips that you’ve made during 2 hours of hard work – particularly sitting in front of computer and looking how your profit is rising. Simultaneously you chat with your friend (who is also a trader) who made the same trade but with USD/JPY by buying it and his profit appears to be 1.5 - 2 times bigger that yours.

You become frustrated about that – How could this happen if US dollar was purchasing across the board? The reason is the GBP/JPY cross – not always of course, but very often, at least when we’re speaking about technical reasons.

When Fed has announced rates hike, USD/JPY jumps up, and if it has broken some significant resistance level – it has triggered a lot of buying stop orders. These pushed the USD/JPY even higher. This has led to even more weakness of JPY and pushed crosses, particularly GBP/JPY higher also. Breakout traders start to step-in after the breakout and join with the up move. This makes GBP/JPY also pass through some solid resistances and trigger its own stop losses. But now JPY stands on the other side of GBP/JPY pair, hence triggering stops will lead to buying GBP and selling JPY. This will increase weakness of JPY but makes GBP a bit stronger and slow down GBP/USD down move. That’s why GBP/USD fall becomes a bit slower and this pair does no show such a great result as USD/JPY.

Still keep in mind that although there could be difference in pips, the result also could be different in terms of currency. With GPB/USD you will get profit in USD, while in USD/JPY in JPY. When you will compare this result in same currency it could be different.

We’ve discussed only a theoretical example, but in reality this interdependence between all pairs is much more complicated, so impact of technical factors will not be so simple to analyze and predict. The GBP/USD could have influence not only on the GBP/JPY cross but on other crosses as well. What will be resulting impact? – it’s hard to predict, especially when the moves fast.

So enjoy with any profit that you could get and save, whistle on the road to the bank and don’t care about what could happened if you had traded USD/JPY instead.

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