There are instances in the forex market where a currency becomes scarce and an exotic currency. Exotic currencies are typically from developing countries in Asia, Africa, the Middle East, and the Pacific. A strange currency pair appears to be a primary currency paired with money from an emerging economy, such as the Mexican peso, Hong Kong dollar, or several currencies outside the Eurozone.
Because of the lack of liquidity in these markets, these pairings are rarely traded due to high transaction costs (which are higher than those observed in major or minor currencies). Due to the high level of interest in exotic currencies, exotic trading currencies could be very different from trading majors or minors. Do your research, for example, find out why is South Korean Won so weak and how the lack of activity in the exotic currency market means that these currencies will have a high risk and high transaction cost, but these pairs may be mastered with the right approach and trading mentality.
Exotic currency rates have wider spreads than main or minor currency rates. When trading exotic currencies, traders should exercise prudence and consider the higher space when calculating potential gains. It is not always simple to trade unusual currencies. It is partly due to the status of financial markets in emerging nations and their quick oscillations, which almost always result in a sharp rise or fall in the value of the country’s currency. That’s why it’s critical to grasp the fundamentals of how the market works and stay current on fundamental announcements for the specific country so you can anticipate these changes.
Here is the list of exotic currency pairs:
- EUR/TRY (Euro/Turkish Lira)
- USD/TRY (US Dollar/Turkish Lira)
- USD/SEK (US Dollar/Swedish Krona)
- USD/NOK (US Dollar/Norwegian Krone)
- USD/DKK (US Dollar/Danish Krone)
- USD/ZAR (US Dollar/South African Rand)
- USD/HKD (US Dollar/Hong Kong Dollar)
- USD/SGD (US Dollar/Singapore Dollar)
- USD/THB (US Dollar/Thailand Baht)
- USD/MXN (US Dollar/Mexican Peso)
Here are the risks when you trade to exotic currency pairs:
1. Monitoring and forecasting growth based on macroeconomic considerations (i.e., offers demand and supply trends for distant nations can be challenging, thus leading to accelerated risks.)
2. Another issue with trading exotic currency pairs is the lack of liquidity, partly due to settlements carried out at banks at predetermined fixed prices.
3. During situations of political uncertainty, high fluctuations occur, making it difficult for even experienced investors to trade exotic currency pairs. The surge in the Russian Ruble (RUB) versus the US dollar from 33.5 to 39.0 between July and September 2014, as a result of the Ukrainian crisis, is a good example.
It isn’t for everyone to trade exotic currency pairs. High markup costs and huge bid-ask spreads necessitate long-term profit forecasts that require patience and a thorough understanding of geopolitical and economic repercussions and growths. To be successful while trading exotic currency pairs, one’s trading personality must be compatible with the necessary abilities and risks. When you want to learn more about exotic currency pairs or even any trading pairs, JustForex is offering forex trading tips for India.