Major crosscurrency pairs

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Although the vast majority of currency trading takes place in the dollar pairs, cross-currency pairs serve as an alternative to always trading the U.S. dollar. A cross-currency pair, or cross or crosses for short, is any currency pair that does not include the U.S. dollar. Cross rates are derived from the respective USD pairs but are quoted independently.

Crosses enable traders to more directly target trades to spe cific individual currencies to take advantage of news or events its.

For example, your analysis may suggest that the Japanese yen has the worst prospects of all the major currencies going forward, based on interest rates or the economic outlook. To take advantage of this, you'd be looking to sell JPY, but against which other currency? You consider the USD, potentially buying USD/JPY (buying USD/selling JPY) but then you conclude that the USD's prospects are not much better than the JPY's. Further research on your part may point to another currency that has a much better outlook (such as high or rising interest rates or signs of a strengthening economy), say the Australian dollar (AUD). In this example, you would then be looking to buy the AUD/JPY cross (buying AUD/selling JPY) to target your view that AUD has the best prospects among major currencies and the JPY the worst.

The most actively traded crosses focus on the three major non-USD currencies (namely EUR, JPY, and GBP) and are referred to as euro crosses, yen crosses, and sterling crosses. Table 2-2 highlights the most actively traded cross currency pairs.

Table 2-2 Most Actively Traded Cross Pairs

ISO Currency Pair

Countries

Market Name

EUR/CHF

Eurozone/Switzerland

Euro-Swiss

EUR/GBP

Eurozone/United Kingdom

Euro-sterling

EUR/JPY

Eurozone/Japan

Euro-yen

GBP/JPY

United Kingdom/Japan

Sterling-yen

AUD/JPY

Australia/Japan

Aussie-yen

NZD/JPY

New Zealand/Japan

Kiwi-yen

Base currencies and counter currencies

When you look at currency pairs, you may notice that the currencies are combined in a seemingly strange order. For instance, if sterling-yen (GBP/JPY) is a yen cross, then why isn't it referred to as "yen-sterling" and written "JPY/GBP"? The answer is that these quoting conventions evolved over the years to reflect traditionally strong currencies versus traditionally weak currencies, with the strong currency coming first.

It also reflects the market quoting convention where the first currency in the pair is known as the base cur-rency.The base currency is what you're buying or selling when you buy or sell the pair. It's also the notional, or face, amount of the trade. So if you buy 100,000 EUR/JPY, you've just bought 100,000 euros and sold the equivalent amount in Japanese yen. If you sell 100,000 GBP/CHF, you just sold 100,000 British pounds and bought the equivalent amount of Swiss francs.

The second currency in the pair is called the counter currency, or the secondary currency. Hey, who said this stuff isn't intuitive? Most important for you as an FX trader, the counter currency is the denomination of the price fluctuations and, ultimately, what your profit and losses will be denominated in. If you buy GBP/JPY, it goes up, and you take a profit, your gains are not in pounds, but in yen. (We run through the math of calculating profit and loss later in this chapter.)

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