Exotic Currency Pairs: A Comprehensive Guide
Exotic Currency Pairs are unique currency pairs in the foreign exchange market. They are less traded than major currencies and are known for their low liquidity and high volatility. These pairs usually involve one primary currency paired with a currency from a developing or emerging country.
What are Exotic Currency Pairs?
In simple terms, a currency pair compares two different currencies. The value of one currency is quoted against the other. The first listed currency of a pair is known as the base currency, and the second is called the quote currency.
Exotic Currency Pairs are unique because they involve a major currency paired with a currency from an emerging or less-developed country. These pairs are less traded than major currencies, which leads to lower liquidity and higher volatility.
Trading with Exotic Currency Pairs
Investors often find trading with exotic pairs rewarding due to higher potential returns. However, these pairs are riskier than major currency pairs because they are less traded and more volatile.
Here are some examples of exotic currency pairs:
1. EUR/TRY (Euro/Turkish Lira): This pair involves the Euro and Turkish Lira. The Turkish economy’s volatility can lead to significant price movements in this pair.
2. GBP/ZAR (Pound Sterling/South African Rand): This pair involves the British Pound and South African Rand. The South African economy is heavily influenced by commodity prices, leading to volatility in this pair.
3. AUD/MXN (Australian Dollar/Mexican Peso): This pair involves the Australian Dollar and Mexican Peso. Australia and Mexico are significant commodity exporters, leading to volatility in this pair.
4. USD/THB (U.S. Dollar /Thailand Baht): This pair involves the U.S. Dollar and Thailand Baht. Tourism and exports heavily influence Thailand’s economy, leading to significant price movements in this pair.
5. JPY/NOK (Japanese Yen/Norwegian Krone): This pair involves the Japanese Yen and Norwegian Krone. Both Japan and Norway have significant export economies, leading to volatility in this pair⁴⁵.
Most Volatile Exotic Currency Pairs
Some currency pairs are known to be highly volatile. These are often referred to as exotic currency pairs. Here, we’ll take a look at three of the most volatile exotic currency pairs:
USD/SEK (U.S. Dollar/Swedish Krona): This pair involves the U.S. dollar and the Swedish Krona. The Swedish Krona is known for its volatility, which can lead to significant price movements in this pair.
USD/TRY (U.S. Dollar/Turkish Lira): This pair involves the U.S. dollar and the Turkish Lira. The Turkish economy’s volatility can lead to significant price movements in this pair.
USD/BRL (U.S. Dollar/Brazilian Real): This pair involves the U.S. dollar and the Brazilian Real. The Brazilian economy’s volatility can lead to significant price movements in this pair.
These pairs are volatile because they can move more than 400 points daily. This means that the value of these currencies can change rapidly in a very short time, making them potentially profitable but also risky.
It’s important to note that trading these pairs can be risky due to their high volatility and lower liquidity than major currency pairs. Liquidity refers to how quickly a currency can be bought or sold without affecting its market price. Major currency pairs like USD/EUR or GBP/USD have high liquidity, meaning they can be purchased or sold in large quantities without significantly changing the market price.
On the other hand, exotic currency pairs like USD/SEK, USD/TRY, and USD/BRL have lower liquidity. Even small trades can significantly affect the market price, leading to rapid and potentially significant price movements.
List of Exotic Currency Pairs
|U.S. Dollar / Brazilian Real
|U.S. Dollar / Offshore Chinese Yuan
|U.S. Dollar / Czech Koruna
|U.S. Dollar / Danish Krone
|U.S. Dollar / Hong Kong Dollar
|U.S. Dollar / Hungarian Forint
|U.S. Dollar / Indian Rupee
|U.S. Dollar / Mexican Peso
|U.S. Dollar / Norwegian Krone
|U.S. Dollar / Polish Zloty
|U.S. Dollar / Romanian Leu
|U.S. Dollar / Russian Ruble
|U.S. Dollar / Saudi Arabian Riyal
|U.S. Dollar / Swedish Krona
|U.S. Dollar / Singapore Dollar
|U.S. Dollar / Thai Baht
|U.S. Dollar / Turkish Lira
|U.S. Dollar / South African Rand
In conclusion, while trading exotic currency pairs can offer high returns due to their high volatility, it also comes with higher risks. Therefore, traders should have a thorough understanding of these pairs before investing. Researching and understanding the risks involved before diving into forex trading with exotic currency pairs is always a good idea.
J.J Edwards is a finance expert with 15+ years in forex, hedge funds, trading systems, and market analysis.