In the early times, it is not possible to trade a foreign currency to another currency without first converting it into U.S. dollars. Say for example, if a trader wants to trade his euro for pounds, he should first convert the euro to U.S. dollars before he will be able to trade it into pounds.
Luckily, this is just a thing of the past. With the existence of the cross currency pairs, traders could now skip the process of having to convert their currencies for U.S. dollars, and they can now simply trade it directly to the currency of their choice.
Why Trade Cross Currency Pairs?
Traders can take advantage of the cross currency pairs to trade a good performing currency against a bad performing one and gain profit from it.
Say for example, if a tough economic statistic came out of Australia, this calls as a good time to buy AUD. The first thing that might come into your mind is to buy the AUD/USD pair. However, what if the U.S. is also currently undergoing a strong economic development? Then you might not be able to earn a profit from the AUD/USD pair as it may appear flat.
What you can do is to match the Australian dollar against the currency of an economy that is currently not performing well.
With the existence of cross currency pairs, it is now possible to do this.
Say you’ve made some analysis, and found out that the economy of Japan is currently not performing well.
What are you going to do? If you’re a sane trader who’s looking to make profit out of trading, then you will jump into this opportunity and go long AUD/JPY. This way, you can take advantage of this situation to add more money to your pocket.
Because of the existence of cross currency pairs, you are now able to match the currency of a well performing economy against a worst performing economy as long as a cross currency pair exists for them and your broker is able to offer it for you.