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How Crosses Affect USD Pairs
"Learn how currency crosses impact USD pairs, influence market trends, and shape trading opportunities. Understand key factors that drive correlations and volatility."
Wikilix Team
Educational Content Team
Have you ever seen USD pairs – EUR/USD or USD/JPY, for example – not behaving as you anticipated, even if the US economic data was good or bad? Often this has a lot to do with what are referred to as currency crosses or "crosses" – currency pairs that exclude USD as one of the two currencies of the pair, such as EUR/GBP, AUD/JPY, or GBP/CHF.
Crosses may indirectly or directly "pull" or support movements in USD pairs through correlation, market sentiment, and capital flows. Understanding how crosses can pull or be correlated with USD pairs in ways that may seem counterintuitive will give you an advantage. This article will illustrate several of the mechanisms behind it, some examples in real-life scenarios, and how you can weave it into a sound trading strategy.
A cross currency pair is any pair of currencies that excludes the US dollar from the pair. For example, EUR/GBP (Euro vs British Pound), AUD/JPY (Australian Dollar vs Japanese Yen), or GBP/CHF (Pound vs Swiss Franc) are all examples of crosses. These can be differentiated from USD crosses or USD pairs because the US dollar is one of the two currencies in the convertable pair (GBP/USD, USD/CAD for example).
Crosses are commonly used to give the direct value of two economies that exclude USD. Crosses are also an important part of the currency in the foreign exchange industry. Blueberry Markets+2OpoFinance Blog+2
Positive and Negative correlations
Crosses can be either correlated or anti-correlated to USD pairs. For example:
• If EUR/GBP is up, that may also mean that the EUR is strengthening versus GBP, which can strengthen EUR/USD, which wants to pressure USD/GBP to go lower, assuming USD has not changed. • In the same vein, a strong move in AUD/JPY might affect the USD/JPY or AUD/USD pairs because of the everyday currency exposure (JPY or AUD). The interconnectedness of crosses means that traders will want to monitor the crosses to see where other markets may influence moves in USD pairs.
Crosses tend to be a multiplier of global risk sentiment or commodity based moves. Consider this:
• If investors are optimistic on risk, commodity currencies (AUD, NZD, CAD) will likely rally. They might also strengthen via crosses, and this may carry USD pairs (USD/CAD, USD/AUD - in this case, the USD pairs would have been strengthened).
• Conversely, in times of increased risk aversion, traders will typically pile into traditionally safe-haven currencies (USD, JPY, CHF)- this is a time when you will usually see the crosses (including AUD/JPY) related to risk assets take a tumble, which translates to USD pairs.
Sometimes, traders will not be directly trading a cross but instead will build a synthetic cross using USD pairs. Consider the following example:
• If you want to get long EUR/JPY, but only USD pairs are liquid (EUR/USD and USD/JPY), you can use these together in either order to effectively be long EUR/JPY.
• Then, typically, the movement in EUR/JPY should roughly combine the movement in EUR/USD and USD/JPY. Any change in either of those pairs will carry over as well, which effectively gives more movement in the cross.
So clearly, large movements in the USD pairs should imply a move in the cross and vice versa.Investopedia+1
• Spillover Volatility - A significant move in a cross (GBP/JPY, for example) can spill over into USD/JPY or GBP/USD as traders adjust their exposure.
• Liquidity Effects - When crosses are less liquid, a significant trade or news event in those crosses can move the crosses a lot. When traders use crosses (or synthetic versions) to hedge or trade USD pairs, those movements also appear in USD pairs.
• Risk Premium Adjustments - Crosses might adjust quickly to global risk sentiment (e.g., political events, commodity prices), and USD pairs will need to catch up. This can create a situation where USD pairs are more volatile than US domestic fundamentals would suggest.
Let's consider a couple of actionable examples, where crosses caused USD pairs to behave in unpredictable ways:
Example 1: EUR/GBP Moves and EUR/USD
A UK positive data surprise comes out, and GBP strengthens vs. EUR. EUR/GBP falls. Because EUR/USD is a more widely watched pair, EUR may also lose vs USD (possibly because USD didn't budge). This causes EUR/USD to drop more than expected without any US data to expain it. The crossing movements ripple into EUR/USD, and traders who look only at USD data may be surprised at this sequence.
Example 2: AUD/JPY & USD/JPY
Assume a scenario where risk appetite improves (e.g., commodities rally, global equities up). The cross AUD/JPY (risk sensitive cross) may move up aggressively and that likely has to do with AUD strength and JPY weakness. It's also possible that the USD/JPY rises, in part, due to the same JPY weakness – even if the USD side hasn't changed significantly. Thus, a trade in AUD/JPY generates signals that are useful for timing USD/JPY.
Not all crosses will always affect USD pairs the same. Here are factors that can change how strong the effect actually is:
• Interest rate differentials: When the US is adjusting interest rates differently from the countries in a cross, then this impacts capital flows and swaps, thus amplifying the effect.
• Liquidity & trading volume: Majors (USD pairs) are very liquid. When crosses have low liquidity, then big orders or news will impact them more and stronger reflections will occur in USD pairs.
• Correlated economic drivers: If two economies have shared exposure (comdities, global cycles, inflation trends), then the crosses will move together again creating a more coherent effect on the USD pairs.
• Policy & central bank actions: Any surprise actions by "central banks" in Europe, Asia, or elsewhere typically trigger cross moves which catch the USD pairs in the flow.
Here are functional ways to put more thought into trading and pay attention to the crosses:
• Observe Key crosses as leading indicators. Key crosses to follow: EUR/GBP, AUD/JPY, and GBP/JPY. There will often be moves in the crosses that will happen before USD pairs.• Use Synthetic Crosses to Confirm Direction: If both the EUR/USD and USD/JPY pairs are showing movement, then check the EUR/JPY if it's tradable to see if the combined movement is in line with your expectations.
• Use Cross Volatility to Manage Position Risk: Understand that cross movements can, and often do, increase the volatility of USD pairs. Therefore, use a larger stop loss and/or a smaller size when the crosses are moving fast.
• Stay Aware of Global News: More and more cross movements are influenced by fundamental data that is not USD-related (i.e, Brexit, Eurozone Debt, Asia Central Bank Policy). Staying up-to-date on currency news is a distinct advantage.
• Diversify Your Exposure: If your account is perhaps only trading USD pairs, then you may be surprised by an unanticipated correlation trade from across currency pairs. Therefore, a good account exposure will have as many cross trades as possible and a hedge.
The USD pairs shown on your charts do not exist in a vacuum. Crosses, currency pairs that do not have a USD, will be a significant influence on all USD pairs, through correlation, market sentiment, interest differentials, or market spill over from crosses. If you choose to ignore crosses you may wrongly read a signal, improperly price risk or even be taken by surprise by a sudden move in a USD pair.
To trade USD pairs efficiently, you should incorporate cross-currency pairs into your toolkit to monitor and observe for confirmation, understand the underlying drivers of movements, and utilize them in your risk management. Once you start to think of the forex market as a web of connections, i.e., not just USD vs everyone else, you will become better prepared for what the charts tell you, and what they don't, and how to adjust driving USD pairs.
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