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What moves GBP/JPY, EUR/JPY, etc.???

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  • First Post: Jul 5, 2008 4:30pm Jul 5, 2008 4:30pm
  •  Geldmeister
  • | Joined Jul 2006 | Status: Member | 280 Posts
I am not a complete rookie but was too embarrassed to ask this question in a pair related thread such as Auslanco, but what I cannot get my head round is:
Traders make a lot of references to GBP/JPY being 'made up of GBP/USD and USD/JPY, i.e GJ = GU x UJ, and yes, when you multiply the 2 prices you get the price of GJ. But what does primarily move a pair like GJ - the 2 majors GU and UJ or people trading GJ directly?

Thanks for any insights!
Consistency and patience is everything
  • Post #2
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  • Last Post: Jul 10, 2008 10:16am Jul 10, 2008 10:16am
  •  DaveL
  • | Joined Aug 2006 | Status: Member | 142 Posts
Yes, cross pairs (e.g. GPB/JPY, etc) are traded directly, but because banks and institutions are always trying to get the best price on large orders, they may split an order for a cross between its constituent majors.

Here's the idea:

Imagine you're a bank and you have a big order to buy a cross, such as GPB/JPY. Well, if you simply buy GPB/JPY directly, your order will probably cause GBP/JPY's market price to go up before it is completely filled, and as a result, you don't get the best deal for your client.

Instead, you split the GBP/JPY long order by buying both GBP/USD and USD/JPY. First, you go long a little GBP/USD (buy GBP, sell USD). This causes USD/JPY's price to go down a little (since USD gets a bit cheaper due to your Cable purchase). Then you can take advantage of the slightly depressed USD price to go long a little USD/JPY (buy USD, sell JPY), getting it at a more favorable price than before your Cable purchase. This causes GBP/USD's price to go back down a little (since USD gets a more expensive due to your USDJPY purchase). Then, you can go long again a little more GBP/USD at the cheaper price ... and on and on, bit by bit buying GBP/USD and USD/JPY one after the other ... until you fulfil the entire long GBP/JPY order. By doing it this way, you will have fulfilled the entire GBP/JPY order without much raising GBP/JPY's price at all, thus getting the best deal for your client as possible.
Dave
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