We all know that the direct and
indirect quotes are associated with the American currency and newbies
may often wonder, what if the currency combination doesn't involve
the USD? Currency pairs that doesn't involve USD are regarded as
Cross rates.
In order to be used effectively, Cross
rates requires an established background in the subject of economy
because the trader will have to consider two different economies as
opposed to only one on a usual rate. It makes things a little more
complicated but it may turn out fine once you got used to it.
For example, you are foreseeing a
favorable economic event in Australia due to its strong relationship
with China and at the same time the New Zealand's economy will be in
bad shape due to a recent disaster that devastated the country. It's
quite obvious that you should buy the Aussie and sell the Kiwi but
there's a problem. You don't know what will happen to the US economy.
To cancel the unknown factor out of the formula, which is the USD,
you have to open a position with the same volume with USD/AUD and
NZD/USD.
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