Cross currency, unlike their major and commodity counterparts, do not get paired with US dollar. This means cross currency traders need not worry about US economy affecting their business. This one deals with cross currencies in Forex markets and their strong points concerning range-trading.
What is the purpose of cross currency?
For a very long period of time, the US dollar was the intermediary for currency exchange; it means if you were a trader in a Forex market, looking to exchange currencies you had to convert your currency to dollars and then convert those dollars into whichever currency you needed. For instance, if you has Swiss francs and needed yens, there was no way to swap them directly. Instead, you had to convert your francs into dollars and then use those dollars to buy yens. Luckily, now that cross currencies are part of the mainstream of financial markets, you can simply exchange currencies directly, much faster and at considerably lesser expense, although some less liquid currencies still use US dollars as medium for conversion. Today, the euro is the most traded cross currency in the world.
Modern currency crosses in Forex markets
Currency crosses are widely considered the best choice for range-bound trading, at least in Forex markets. This is especially true for EUR/CHF, the reasoning for this being that the economic growth rates for Switzerland and the European Union are similar and connected. The similarity between countries whose currencies are crossed help stabilize any major changes that might occur, making them ideal for range-bound trading – since they rarely exceed certain parameters. In the earlier example (EUR/CHF), it is hard to imagine major shifts in the economy of Switzerland without the European Union being affected – or vice versa. This is why there is a constant pressure from both parties to preserve or restore the status quo as efficiently as possible. It doesn’t take a financial genius to figure out what would happen if say, Switzerland let its currency run rampant on the markets – the whole Europe (and not just Europe, but every related market – financial or otherwise) would be reeling from the aftershock for some time. Such condition simply could not last, because the backlash would affect Switzerland as well. This is what makes cross currencies a relatively safe bet when it comes to trading range – things just don’t work that way when it comes to other securities. Currencies are relatively immune to microeconomic events, unlike stocks and commodities; only macroeconomic events are powerful enough to affect currencies. However, macroeconomic events happen too, so it might behoove you to place a stop limit on your range trading, just in case.
Cross currencies in Forex markets are ideal for range trading. The main reason is that countries behind those currencies have a vested interest in keeping them liquid and stable. You practically have a whole country looking after your investment – how awesome is that?