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Exotic currencies are those that you don't hear about very often. These are often more volatile because they come from smaller markets and are more prone to change. This makes several traders wary of them and terrified by the prospect of investing in something so risky.
Exotic currency pairs are quotations that combine one major currency, such as the US dollar or the British pound, with a currency from a developing country, such as the Swedish krona or the Turkish lira. Exotic currency pairs in the foreign exchange market are less liquid than major currency pairs.
However, when it comes to forex trading, where there is a risk, there are sometimes some of the best trading opportunities. These opportunities include:
- Exotics will move for real, rather than just a slight jump or drop, whenever resistance or support is broken. As a result, traders can consider the next level of resistance or support as a very likely target for trading.
- They will move frequently, and by a significant amount, so there's always an opportunity to enter a position and profit from these moves if you know what you are doing.
The best exotic currency pairs have a significant bullish or bearish trend potential in the current trading period. There are chances for a trend following system for that exotic currency pair if traders perceive a definite trend direction and increasing volatility.
GBP/ZAR – British pound/South African rand
GBP/ZAR includes the official currency of the United Kingdom, which is regarded among the world's top reserve currencies, and the South African rand, a middle-income emerging market currency.
GBP/ZAR is influenced by the following:
- Monetary policy
- Economy Growth
- Commodity prices
- Political stability
The benefits of trading GBP/ZAR include:
- High-interest rates: Both the GBP and the ZAR have high interest rates, resulting in a profit. While the British pound was formerly thought to be a stable currency, the financial crisis of 2008 and Brexit have contributed to a rise in interest rates.
- High-exchange rates: The GBP/ZAR pair has undergone significant volatility since 2020, coming close to its all-time high in 2016. High levels of activity have resulted in high levels of volatility, which can be beneficial to forex traders.
JPY/NOK – Japanese yen/Norwegian krone
The JPY/NOK exchange rate provides traders with a safe haven during market volatility because they are two of the world's most stable currencies. The pair's volatility also allows for a constant profit when converting JPY to NOK.
JPY/NOK is influenced by the following:
- Economic influence
- Oil prices
- Government intervention
The benefits of trading JPY/NOK include:
- Oil prices: Because Japan imports 99% of its oil, global oil prices can affect the JPY/NOK rate. Following oil prices, for example, can make the currency pair reasonably easy to follow.
- Safe haven: The yen is regarded as a safe-haven currency. During times of market volatility, it is likely to keep or gain in value. In the case of a market slump, investing in safe havens can help you minimize your losses.
- Availability of resources: The JPY and the NOK have a wealth of publicly available government and economic data.
AUD/MXN – Australian dollar/Mexican peso
The AUD/MXN currency pair is a widely traded exotic pair. The Australian dollar is the world’s fifth most traded currency and has a very stable value. The Mexican peso provides liquid access to South America, which has experienced substantial market growth in recent years.
AUD/MXN is influenced by the following:
- Commodity prices
- Central bank policies
- Balance of payments
The benefits of trading AUD/MXN include:
- Predictability: Majors and minors are more challenging to predict than exotic pairs. With the AUD/MXN, the Australian dollar's influence may outweigh that of the Mexican peso. Those already familiar with the AUD/TRY and USD/MXN may find it easier to learn the AUD/MXN.
- High-interest rates: Due to high-interest differences, both the AUD and MXN can be used as carry trades in other currency pairs, such as USD/MXN and AUD/JPY.
- Volatility: Exotic currency pairs, such as the AUD/MXN, have a high level of volatility. Day traders have a lot of opportunities to make money because of the frequent price swings. The success of their export-based economies also determines the relative strength of the AUD and MXN.
USD/THB – US dollar/Thailand baht
The USD/THB currency pair represents the exchange rate between the US dollar and the Thai baht. The United States dollar is the world’s most widely held reserve currency, while the Thai baht is an emerging market currency that has recently increased in value versus the US dollar.
USD/THB is influenced by the following:
- Political stability
- Trade balances
- Economic growth
The benefits of trading USD/THB include:
- Status: While exotic currency pairs often get linked with unstable economies, the USD/THB is not one of them. With low-yielding bonds, the Thai baht has a significant account surplus with robust exports and currency reserves, while the US dollar is regarded as a worldwide reserve currency.
- USD: Getting to know this pair could be simple for traders who are already familiar with the economic and geopolitical influences on the US dollar. The impact of major currencies, such as the US dollar, tends to overwhelm exotic currencies, like the Thai baht.
- Volatility: Exotic currency pairs, such as the USD/THB, have higher volatility than major and minor currency pairs. This usually means additional opportunities for forex traders to profit from market activity.
EUR/TRY – Euro/Turkish lira
The EUR/TRY currency cross's historical volatility has intrigued forex traders. Today, thanks to monetary policy in the Eurozone, that volatility has partly stabilized, but there are still excellent trading opportunities. Because of the TRY's complicated history, the currency can fluctuate as the country struggles to maintain financial stability.
EUR/TRY is influenced by the following:
- Economic factors
- Political factors
The benefits of trading EUR/TRY include:
- Volume: Because of the large number of active traders, volatility is relatively significant. All of this can contribute to a higher profit potential when investing in this pair.
- Prevalence: One of the most widely used reserve currencies is the Euro. Because of its size, it releases a lot of financial data. As a result, forecasts for the EUR/TRY pair are relatively straightforward.
- Stock indicator: The EUR is regarded as a stock market leading indicator. As a result, traders who are already experienced with stock markets may find forecasting forex trading easier.
Brokers Are Important When Trading Exotic Pairs
If you're interested in trading exotic pairs, it's also a good idea to ask your broker what they have to offer. Many brokers demand exorbitant fees to trade exotic pairs, while others only provide major and minor pairs.
Exotic pairs are also a risky investment for brokers, so they charge more to make a profit. Some brokers want their traders to have a large position to balance out the pip value.
In contrast, many brokers propose that a small long trade would be more beneficial, such as a swing or carry trade. As a forex trader, you should know that exotic forex trading requires higher spreads, which increases the risk, costs, and cash required to enter the trade.