Three Great Reasons to Get Rid of the Dollar And NEVER Look Back…

Throughout the year, I speak at Forex events all over the world. These days, everyone tends to bill me as the “currency cross guy.”

So inevitably, someone at the conference always pulls me aside to ask why I don’t bother to trade the dollar anymore. They want to know why I trade currency cross-rates – or foreign exchange rates that don’t involve the dollar – instead.

I tell everyone the same thing. It’s because there’s no competition profit-wise. These pairs also hold several other distinct advantages over trading the regular, (read: boring) majors.

The first one may surprise you…

Reason #1: Currency Crosses Are Less Liquid Than the Majors

Now you may be saying, “What? Then why in the world would I want to trade them?”

Notice I said “less liquid” NOT “illiquid.” Big difference. If these pairs were illiquid, then you’d be able to drive a Mack truck through the spreads. And in Forex, you pay your Forex dealer the spread (the difference between the bid and ask price) as your fee for each trade. So the tighter spreads the better.

However, the good news is most currency crosses have plenty of volume, but their spreads are still low enough to make these trades worth your time. For instance, the EUR/JPY (euro/Japanese yen pair) carries less volume than EUR/USD but still provides MORE than enough volume to keep the spreads low.

Now, why do you want to trade LESS liquid pairs?

It’s simple. If the currency pair you’re trading has less volume, then it’s easier to move that pair. Small events make these pairs jump higher and faster than your average slow-moving major.

For instance, say a big institution decides to buy 1 billion units of EUR/JPY (also known as a yard). That would have a much bigger impact on the currency pair. In fact, it could shoot this pair much higher, faster than if that same institution bought the euro/dollar pair (EUR/USD).

If you trade stocks, then you’re probably familiar with the concept of a company having fewer shares outstanding vs. a company that had a ton of outstanding shares in the market. The fewer the amount of shares outstanding in the market, the more easily the stock is moved.

Picture the EUR/JPY as a stock with fewer outstanding shares and the EUR/USD pair as a mature, blue chip stock with a ton of shares outstanding, and you’ll understand why I prefer the EUR/JPY pair.

Reason #2: Currency Crosses = Extreme Movers!

Currency crosses generally have wider interest rate differentials than your standard dollar-based major.

This means you can pair an extreme high-yielding currency with a high interest rate, with an extreme low-yielding currency with a lower interest rate. That way you get the biggest difference in yield between the two currencies.

To make this simple, check out the chart below.

Trading the Highest vs. the Lowest Yielders Can Hand
You Some Incredible Profits!

Notice on the chart above that Australia has an interest rate of 3.75% but Japan only has an interest rate of 0.1%. Meanwhile, the U.S. has a rate of 0.25%.

Now if you wanted to pair these together, obviously Australia would be the high yielder. But Japan is actually a lower yielder than the dollar. So the AUD/JPY makes a better pairing than the AUD/USD because the AUD/JPY has a wider interest rate differential.

Why does this matter? Let’s look at it this way.

Let’s assume you went to a bank and could pick your borrowing rate. You could either borrow at a rate of 0.1% or 0.25%. Then you can re-invest those funds in an asset that earns 3.75%.

Wouldn’t you pick the lower borrowing rate? I would. Then you have the opportunity to earn the highest rate possible, and reap the biggest profit between the two interest rates.

Well, currency cross traders all over the world agree with me too. That’s why they prefer to buy the AUD/JPY as opposed to AUD/USD.

So wider interest rate differentials give you an edge with currency crosses. But that’s not all…

Reason #3: Currency Crosses Are the Ultimate David & Goliath Trade

When you’re trading currency crosses, you have a much easier time pairing the strong currencies with the weak currencies. I like to call these “David/Goliath” pairs.
Let me show you what I mean by giving you another example…

Pick Your Contenders!

Above, you’ll see a chart that shows the rate of inflation for the G-8 economies.

The name of the game is to pair up the highest inflation currency vs. the lowest inflation currency (or even better yet, deflation currency). Right now the U.K. economy is showing inflation, while the Japanese economy is still wallowing in deflation.

So if you paired up the inflation-bound British pound with the deflation-ridden Japanese yen, you would be pairing the strongest with the weakest pair.

In other words, you’re stacking the odds in your favor by pairing the strongest vs. the weakest contender and betting on the stronger one, the “Goliath” of this currency trade.

Getting Started with Cross-rates

Once you have the best vs. worst pairings, then you can go to your charts and see which ones look best from a technical perspective. But it’s crucial to first weed them down fundamentally. That gives you your trading candidates.

Then using your technical indicators, you get your entry signals for the pairings. Remember: Just because the fundamental indicators are there, does NOT mean it’s the best time to buy. Every pair corrects from time to time so you need to take a look at the technicals to find the best entry and exit points.

So there you have it. It’s for these three reasons that I trade crosses mainly instead of the majors: liquidity favors the crosses; interest rate differentials favor the crosses; and currency crosses have the best “strongest vs. weakest” scenarios in the Forex market.

Add it all up, and you have the perfect trading vehicle to earn 50% to 100% more on your Forex trades.

Happy Trading!
Sean Hyman, aka Professor FX

EDITOR’S NOTE: In January, Sean grabbed four winners in a row for his Currency Cross subscribers using this exact blend of fundamental and technical indicators for currency crosses. Read how he did in his latest special report.