What Are Exotic Currency Pairs?
The largest and most liquid global market by volume, Foreign Exchange or Forex, offers various choices. The aim of traders is to profit from the volatility. Are you new to trading in the Forex market? Do you know what exotic currency pairs are?
Here are some intriguing details regarding exotic pairs:
- Donald Trump’s chances of winning the US presidential election in 2016 impacted the USD/MXN, an exotic pair since his policies would have affected commerce with Mexico.
- The Bank of International Settlements conducted a study in 2016. The study indicates that the exotic pair USD/RUB saw a trading volume of just 1.1%, whereas USD/EUR covered 23.1% of daily Forex trading volume.
Have these details piqued your interest in Forex exotic pairs? Discussions center on the currency pairs with the highest trading activity and liquidity. Have you ever wondered why exotic currency pairs are still chosen despite having a lower trading volume and less liquidity?
The value of these exotic combinations is likely to change significantly. However, the potential for profit from trading these currency pairs is debatable. However, there are also undeniable risks connected to them.
Exotic pairs: what are they? Are they prone to volatility? What advantages and restrictions come with trading some currency pairs? To learn more about the numerous facets of exotic currency pairs, read this article through to the end.
Recognizing significant and exotic currency pairs
The Forex market’s trading volume and currency stability are used to categorize major Forex currency pairs. The US dollar, followed by the Euro and the Japanese yen, has the highest trading volume (almost 80% of trades). However, the US Dollar is the base or counter currency for all major currency pairs in the Forex landscape.
The other heavily traded currencies represent the most stable economies and are on the other side of the pair. There are so 7 significant currency pairs in the Forex arena:
EUR/USD. USD/CAD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, and GBP/USD.
Due to the US Dollar being present on one side, these significant currency pairings consistently rank high for the trading volume.
Also Read: What Are The Most Traded Currency Pairs in Forex?
Given that you are familiar with the Major currency pairings used in the Forex market, let’s talk about the exotic currency pairs:
Forex exotic pairs typically have an emerging market currency on one side (as a base or counter currency). Therefore, we will see crucial currencies crossing currencies of developing nations like Mexico, South Africa, and Turkey in this category of currency pairs in the Forex sector.
Here are some of the most widely used exotic currency pairings for forex trading:
What Are the most popular exotic Pairs?
Euro/Turkish Lira (EUR/TRY)
As Turkey seeks entry into the European Union, its Major trading partner, banks, and businesses prefer exchanging Turkish Lira. This phenomenon makes this currency pair more attractive to traders by increasing its trading volume. Similarly, the US dollar, the Turkish Lira (TRY), has also been a very volatile currency due to various economic crises and Turkey’s 2005 economic reforms.
Australian Dollar/Mexican Peso (AUD/MXN)
This currency pair is volatile and appealing to international Forex traders due to seasonal variations in commodity prices and other economic considerations.
The Australian Dollar (AUD) is a currency used for commodities. The third-most traded currency is it. Mexico’s economy, which ranks as the 15th largest in the world, is similarly centered on exports. These two exhibit characteristics of a rising economy and global trade.
US Dollar/South African Rand (USD/ZAR)
The South African economy depends on exports of raw materials, primarily gold, and goods from agriculture and the automobile industry. Given that US Dollars are used to price commodities like gold and diamonds, USD/ZAR is a fascinating exotic currency pair to trade.
In the Common Monetary Area, which consists of South Africa, Lesotho, Namibia, and Swaziland, the South African Rand (ZAR) is recognized as legal money. According to GDP, South Africa has the 31st-largest economy. Its industrial sector is diverse, and its infrastructure is first-rate.
Euro/Hungarian Forint (EUR/HUF)
Since 1946, Hungary has used the Forint (HUF) as its official currency; it has not yet switched to the Euro. Exotic pair volatility is a risk. Recently, it has exhibited bullish tendencies. As a result, it draws Forex traders.
US Dollar/Indian Rupee (USD/INR)
Based on variables like the US Dollar exchange rate, oil prices, Fed rates, and Indian economic statistics like the budget deficit, export-import data, and the PMI, one can speculate about changes in exchange rates for the Indian Rupee. The exotic pair draws traders because of this.
In terms of GDP, India has risen to the fifth-largest economy. It has good commercial ties with the US, and most of its oil imports are paid in dollars. The Indian Rupee is doing well, even if the US Dollar goes better.
US Dollar/Brazilian Real (USD/BRL)
This exotic pair demonstrates an increasing trade balance as the Brazilian economy expands. Despite Brazil’s relatively low reliance on US exports, the currency pair becomes more volatile due to local traders’ interventions during the New York trading window. This makes this exotic couple more alluring.
Brazil has the tenth-largest GDP and ranks eighth in purchase power parity. The currency is stabilizing and increasing due to the increase in agricultural and commodity exports, particularly since the crisis between Russia and Ukraine.
Similarly, the currency’s value relative to the US Dollar is increasing due to the declining unemployment rate. Consequently, it is a preferred exotic pair in the Forex market.
What is volatility? How does it relate to forex market returns?
Volatility in the forex market refers to significant changes in the direction and magnitude of exchange rate movements. The statistical metric used to determine how far exchange rates deviate from the mean is volatility. Volatility denotes how much a currency pair can fluctuate from its mean value.
Let’s quickly examine why exotic forex pairings are more volatile than mainstream ones. The fact that these currency pairs don’t have as much liquidity as the high-value currency pairs should be understood by forex aficionados. They lack market depth. Similarly, they may trade at a smaller volume.
As a result of various influencing factors, you can anticipate frequent ups and downs in the exchange rates of exotic pairs. As a result, these assets are riskier, and the exchange rate is more erratic. High volatility causes the spreads to expand, directly affecting the returns or possibility for profit.
Recent instances
Most exotic currency pairs occasionally have higher volatility than Major currency pairs. They permit large price swings. A recent example is the price changes of EUR/TRY (Euro/Turkish Lira) in May 2023, which fluctuated due to Erdogan’s victory in the Turkish elections.
Opportunities to earn a carry or interest rate are presented by exotic pairs. During the previous ten years, GBP/INR has performed well. But when you pay attention, you can see a struggle in USD/INR.
So, is it possible to make more money trading exotic currency combinations than Major currency pairs? Wait! Successful trading methods for Exotic pairings involve careful planning, accurate analysis, and a lot of patience. Therefore, historical and current Forex data from a reputable market data supplier is crucial.
Exotic pairs trading: Pros and Cons
Positives:
A chance for higher returns
Long-term gains may be higher for exotic pairs because of their potential for rapid growth. To make their trading trip simplified and more successful, seasoned analysts and traders develop trading strategies based on historical data and current patterns.
To provide a realistic picture, seasoned traders combine technical analysis based on historical Forex data with a study of the present-day changes in exchange rates, the impact of economic news, geopolitical factors, and the publication of financial data.
Increasing interest rates
Typically, the central banks of emerging nations maintain interest rates higher than those of wealthy economies. When trading exotic pairings, seasoned traders may profit the most from this interest rate difference.
Appropriate for long-term investments
The exchange rates of these currency pairings might be influenced by geopolitical and economic factors. The impact could last for a prolonged duration. Traders can take advantage of these big swings in exchange rates.
Negatives:
High volatility
Forex exotic pair exchange rates can occasionally vary dramatically. Prices may change more quickly than you anticipate. As a result, the extreme volatility may provide numerous concerns. Therefore, research is essential before trading exotic pairings in a live environment.
Liquidity is low
There are times when the trading volume for exotic pairs is minimal. Because of this, these instruments are less liquid. Please be aware that less liquidity may result in a trap that makes it challenging for traders to exit trades.
Low liquidity may result in substantial financial losses in a high-volatility period. For extended periods, traders may need to keep their assets.
Risk management is essential when trading exotic pairings to prevent future surprises brought on by abrupt changes in exchange rates. Analysts and traders consider risks and make corrections to combat excessive volatility and little liquidity.
Exactly why is reliable forex data essential for exotic FX?
Exotic pairs occasionally trade at a low trading volume, as was previously said. As a result, the reporting among data sources may vary. That makes finding a trustworthy source of Forex data much more important.
To ensure that trading decisions are based on accurate technical analysis, you must depend on a market data provider like us. By obtaining the Forex price feed from respected banks, organizations, and broker-dealer networks, we aggregate it.
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This article was posted originally on TraderMade: What Are Exotic Currency Pairs?
