Cross rates are the relation of two currencies against each other, based on the rate of each of them against a third currency. For example, the Bank of England sells or purchases euros for yen. To calculate the cross rate of the EURJPY, the bank will use the dollar quotes for the two pairs, EURUSD and USDJPY. As such, the Ask and Bid quotes of EURJPY will be calculated as follows: Bid EURJPY = Bid EURUSD x Bid USDJAPY; Ask EURJPY = Ask EURUSD x Ask USDJPY
Let’s say that if there is an upward trend on the EURCAD currency pair, this means that the price of EUR against that of USD is growing at a faster rate than the cost of CAD against USD. It’s worth noting that cross rates are not the primary indicators, although by using them we can quite accurately define the speed at which quotes of key currency instruments change. It’s also worth remembering that cross rates often come under speculative pressure due to the small volumes at which they are traded. Changes in the rates are impacted not only by the economies of said currencies in the cross rate, but also by global fundamental news and the US economy. Therefore only experienced traders tend to be effective when trading cross rates.