Synthetic currency pair is also sometimes referred to a synthetic cross currency pair. What this means is that it’s an artificial pair of currency used in foreign exchange market. In a market, this is usually not available but one has to trade across the said pairs. An often traded currency such as the US dollar that usually does trade with the specified currencies can be considered as an intermediary and on the target currencies, an offsetting position is taken. Nowadays common currency pairs are easily available in the market, this has made the use of pairing of synthetic currency cross less common.
Synthetic currency pairs are neither listed nor carried by brokers or any other liquidity provider. But such synthetic currency pairs can be created while using two alternative pairs for creating the third unique currency pair. Millionaire Blueprint is one such software which can help in using synthetic currency pair.
Synthetic currency pairs help in eliminating the issue of the limited liquidity from the overall market or a broker or in the case of the actual instrument missing which was intended to be traded. Say for example, while trying to buy an Australian dollar or a Canadian dollar, if the broker with whom the trader was trading did not have this available to trade, then a synthetic currency pair can be created by the trader from the two other currencies.
One must consider the costs involved before trading synthetic pairs and also assess if it is really worth doing. It is required to open two different positions for synthetic pair trading. This will increase the exposure to the account and the cost of the trade. There can also be a negative impact of any differentials in the interest rate among the three countries involved, on the trade profitability if carried overnight.
Usually, financial institutions use synthetic currency pairs if it wishes to put on larger positions, however, due to limited market liquidity, it is not possible to do so. But in the retail forex market, it may not make sense practically.
A synthetic currency pair usage has many advantages. Some are mentioned below:
- You can bring down the spread trading costs by using synthetic currency pair.
- Using these synthetic currencies, a trader gets more currencies for trading and hence gets more opportunities.
- Ranges and trends are clearer on currency crosses in comparison to other popular currency pairs.
- You can get benefit from interest rate differences by using synthetic currency pair.