Selling low-interest-rate national currencies against high-interest-rate national currencies, you can make a profit by spreads and exchange rate changes.
Among cross currency pairs, some currency pairs have higher spreads, and these currency pairs are suitable for carry trade.
Let us look at the perfect upward trend of AUD/JPY. If you hold a long AUD/JPY position, your profit will be very impressive.
It is worth noting that the spread between the Australian dollar and the Japanese yen is very large. From 2002 to 2007, the Reserve Bank of Australia has raised the benchmark interest rate to 6.25%, while the Bank of Japan has maintained interest rates at near zero.
This means that you can profit from both long AUD/JPY and the spread between AUD and JPY.
Unpopular cross currency pair
Although the euro and yen cross currency pairs are the most liquid cross currency pairs, the vast majority of cross currency pairs do not include the euro or the yen. We call these currency pairs “unusual cross currency pairs.”
The main currency pairs are like the top students who are concerned, and the uncommon cross currency pairs are like the problem teenagers with strange clothes.
That’s because most traders prefer to trade these more liquid cross currency pairs rather than these uncommon cross currency pairs.
Uncommon cross currency pairs such as AUD/CHF, AUD/NZD, CAD/CHF, and GBP/CHF.
Trading these uncommon cross currency pairs is more difficult and more risky than cross currency pairs such as the euro or yen. Since only a few traders will trade these currency pairs, the trading volume will be very small and the market liquidity will be very low.
Due to the lack of liquidity of these cross currency pairs, their exchange rate volatility will be very large, and all traders will often be stopped.
Let’s take a look at the examples of AUD/CHF and GBP/CHF.
You don’t want to be stopped out by sudden fluctuations, do you? This is why the vast majority of traders will set a wider stop loss when trading these currency pairs.
Because the volatility of cross currency pairs is not too frequent, it is very difficult for traders to trade such currency pairs. Unless you are extremely passionate about trading such currency pairs, that is another matter.
Do you know what we mean?
At the same time, because these currency pairs are not often used for trading, the spread of trading these currency pairs will be very large.
If you plan to trade these currency pairs, you must be prepared for the severe price fluctuations that are likely to occur and the high spread fees that will be paid.