As you probably already know, the most profitable currency pairs to trade are the US dollar, euro, and yen. When it comes to the Dollar, it’s a staple currency and is also known as a world reserve currency with a massive volume of trades. The exotic currency pairs refer to currencies of small and particular countries. These pairs traded much and, therefore, are illiquid with high spreads.
If you are eager to explore some exotic currency pairs, we will give you some useful insights below.
What is an exotic currency: some basics to know
Firstly, you must know that you can’t put all the exotic currency pairs in the same bag. We could classify them into two categories:
On the one hand, currency pairs are made up of a major currency (USD, EUR, etc.) and a currency that has less weight internationally but comes from a politically and economically stable country.
Example: USD/NOK (US dollar / Norwegian krone)
On the other, we have currency pairs made up of a major currency (USD, EUR, etc.) and a currency that comes from an emerging or developing country, with more fragile political and economic conditions.
Example: USD/ZAR (US dollar / South African rand)
No matter which exotic currency pair you choose, there will always be a major currency in the pair.
Secondly, this type of instrument is not suitable for beginners. Not only does it have certain drawbacks but the strategies employed will also not necessarily be the same as for the major pairs. It is also better to have the necessary trading experience before you start.
Trading forex exotic currency pairs: Pros and Cons
To understand the advantages of trading exotic currencies, we must follow some mechanisms of economic policy.
Let’s make it as simple as possible so that you can understand the main points.
An emerging country has a more substantial and faster economic growth than a country like Germany or the United States, for example. These countries apply high-interest policy rates to avoid skyrocketing inflation.
One of the techniques commonly used is to take currencies with a low-interest rate (euro, US dollar, yen, etc.) on the one hand and invest them in currencies with a higher interest rate on the other.
It’s the basic principle of a carry trade strategy. This is also recommended for less-experienced traders.
Disadvantages of exotic currency pairs
There are a few drawbacks associated with exotic currency pairs, and they can have a big impact on your bottom line.
There is often a lack of liquidity. You have to differentiate between pairs of exotic currencies like USD/NOK, which will present more or less regular liquidity, from pairs like USD/ZAR, which will show a noticeable lack of liquidity. And the lack of liquidity can be dangerous for your portfolio.
While for the EUR/USD pair you can pay around one pip or less, it is not the same for exotic currency pairs. Regarding a high cost, it’s best to avoid making many trading rounds as you might do if you are following a EUR/USD scalping strategy.
Some of the most profitable exotic currencies to trade
1. USD/ZAR (the United States Dollar/South African Rand)
Talks over land and farm foreclosures in South Africa and a surge in yields on US government bonds led to the withdrawal of international capital from South Africa, and the ZAR plummeted. The constant risks of a recession in the South African economy have also had a significant impact on the ZAR and its volatility.
2. EUR/TRY (Euro/Turkish Lira)
Traders were always attracted by this forex pair, due to its high volatility. The debt crisis in Turkey led to the devaluation of the TRY by more than 40% against the USD. The volatility of the Turkish lira has recently declined, though. The reason is the Eurozone’s monetary policy aims to maintain stable prices in this area.
3. AUD/MXN (Australian Dollar/Mexican Peso)
The Australian Dollar is hugely volatile. The price fluctuations of many precious commodities have an impact on the AUD too. Considering the huge interest rate differential between AUD and MXN, this exotic pair can bring decent profits in forex trades.
4. JPY/NOK (Japanese Yen/Norwegian Krone)
The Japanese Yen is popular for many traders globally because of its low borrowing costs. On the other side, we have Norwegian Krone, which strongly depends on oil prices. The Norwegian economy is a big exporter of oil. Norway is also one of the most prominent exporters of petroleum products, chemicals. So, if the oil price goes up, the krone grows stronger in comparison to other currencies and vice versa.
Making money on exotic currency pairs won’t necessarily be easy. If you’re interested, educate yourself on the topic, learn, test, and don’t get started until you learn how to trade exotic currency pairs and are sure you know what you are doing. Otherwise, stick with other currency pairs, which are less risky and require a little less expertise.