Trading forex minor crosses: What are forex crosses?
Forex crosses are currency pairs that do not include the US dollar as one of the two currencies. For instance, a sterling/yen cross pairs GBP and JPY without needing to translate each currency into dollar terms.
While the US dollar is on one side of 88% of trades, according to the BIS’s Triennial Foreign Exchange Survey, forex crosses still account for over $600 bn a day.
These include major crosses such as EURGBP and EURJPY, which represent $100bn and $79bn daily volume each, while the EURCHF cross comes in at about $44b. There are two major yen crosses, GBPJPY and EURJPY, which is often viewed as being quite volatile.
Minor crosses trade in lower volume and include a number of CAD crosses (CADCHF, CADJPY and EURCAD), Scandinavian currencies (such as NOK, SEK and DKK against the Euro), and exotics including currencies such as the South African Rand and Turkish Lira or Mexican Peso (eg GBPZAR, EURTRY, EURMXN).
What Are The Fundamental Influences Of The Forex Cross Pairs
Forex cross pairs are influenced by a wide range of fundamentals:
- interest rate differentials
- political news – elections, trade deals
- economic statistics such as jobless/payroll figures, trade balance, inflation
- interest rate moves by central banks
- changes in monetary policy, such as Quantitative Easing
Factors That Influenced Forex Crosses In 2016
For instance, in 2016, GBP crosses were deeply impacted by the result of the Brexit referendum. In the immediate aftermath of the vote, Reuters showed sterling weakening dramatically against the yen and dollar, though anxiety about the impact of Brexit on the EU muted the euro response.
The Aussie and Canadian dollars, on the other hand, tend to rise with good news from the commodities markets on which the countries’ economies rely – the Aussie dollar is also often used as a proxy for the Chinese economy. Bloomberg points out that other commodity-related currencies such as the Ruble and Brazilian Real also outperformed in 2016.
At the end of the year, Trump’s victory in the US Presidential elections also had an impact on currencies, notably the Canadian dollar and Mexican peso. Canada and Mexico will both lose out if Trump abrogates NAFTA, since they’re big exporters to the States.
While trading these currencies against the dollar can also capitalise on news, sometimes a cross will see greater movement in prices, due to such factors as a higher interest rate differential or exactly opposing economic situations (for instance, resource exporting vs resource importing AUD/JPY).
How To Trade Forex Crosses
To start trading forex crosses, traders will need to choose a broker, one factor to take into consideration is the level of your risk tolerance and deposit size. For example, traders with smaller account sizes could find a CFD broker like LCG suits their needs; CFD brokers offer leverage, which allows the traders to control a larger position with a smaller account size. LCG also offer risk management features like guaranteed stop losses for more risk-averse traders.
Choosing a regulated broker is a good rule of thumb, as regulatory supervision affords traders an increased level of security. In the UK, CFD brokers are regulated by the Financial Conduct Authority (FCA). BrokerNotes currently provides comparisons of brokers regulated by the FCA, CySEC and ASiC. Other factors like the number of instruments the broker makes available, could be important if their interest lies in the more exotic minor crosses, as well as at the resources that the broker provides.
Most good brokers provide charting and news feeds, but not all charting packages are the same – some are far more advanced than others, showing different types of charts and allowing traders to track moving averages and Bollinger bands as well as simple price moves. The top brokers will also provide extensive educational resources for free.
Costs can vary considerably between brokers, as do minimum trade and account sizes. Traders should remember to consider the typical spread as well as any commissions charged when looking at costs.
Traders with larger deposits may find they are better suited by an ECN (Electronic Communications Network) account which links them directly to other market participants and enables automated trading. An ECN account gives access to market prices, which will deliver tighter or even zero spreads; the broker charges only a fixed commission. However, there is usually a high deposit amount required to access ECN accounts.
An example of a major forex pair might be the EUR/JPY cross. Looking at a quote, the currency shown to the left is known as the base currency, which always represents a single unit of that currency, and the currency shown to the right is the quote currency. The quote shows how much a single unit of the base currency would buy in the quote currency – in this case, how many yen would a single euro purchase? The quote will show two figures divided by a slash – 118.8/9, for instance; depending on whether a trader is buying or selling the price will be different (the ‘bid’ and ‘ask’ price). The difference between the two is the spread, that is, the broker’s profit margin, which is effectively the major cost to the trader.
When a trade ticket is opened, LCG will also show the margin required for the trade. Leverage on EUR/JPY is 1:500, so that the trader only needs to put up 0.2% of the trade value in ready cash.
Summary: Trading forex minor crosses
Forex minor crosses are popular for traders as they can often offer larger price movements than the major crosses in response to particular news events. They are a less crowded trade than the major crosses, and can also offer greater volatility and opportunities for traders. Trading through a CFD/FX broker allows traders to trade a wide variety of crosses.