What Are Exotic Currency Pairs?
02 June 2023
Foreign Exchange or Forex - the largest and the most liquid global marketplace by volume - brings numerous opportunities. Traders try to find profitability within the volatility. Are you new to the Forex market? Have you heard about Exotic currency pairs?
Here are some interesting facts about Exotic pairs:
- In 2016, the USD/MXN, an Exotic par, was sensitive to Donald Trump's prospects in the US presidential elections, as his policies would have impacted trade with Mexico.
- According to a study in 2016 by the Bank of International Settlements, USD/EUR covered 23.1% of daily Forex trading volume - while the Exotic pair USD/RUB had only a trading volume of 1.1%
Have these facts increased your curiosity about the Exotic pairs in Forex? Usually, Forex pairs with the highest trading volume and liquidity are most discussed. However, have you ever wondered why Exotic pairs are still preferred despite being less liquid and thinly traded at the least trading volume?
You can expect a substantial shift in the value of these Exotic pairs. That said, trading these currency pairs may lead to arguable profit potential. But at the same time, there are inarguable risks associated with them.
What are Exotic pairs? Are they highly volatile? What are the benefits and limitations when trading these currency pairs? Keep reading this article till the end to reveal various aspects of Exotic currency pairs in Forex.
Understanding Major and Exotic Currency Pairs
Major currency pairs are defined by the trading volume and currency stability in the Forex market. The US Dollar has the highest trading volume (Almost 80% of trades), followed by the Euro and Japanese Yen. Yet, while forming the pairs, the major currency pairs in Forex always have the US Dollar as the base or counter currency.
The other highly traded currencies, representing the most stable economies, are on the other side of the pair. Thus, there are 7 major currency pairs in Forex:
EUR/USD. GBP/USD, USD/CHF, USD/JPY, USD/CAD, AUD/USD, and NZD/USD.
These major forex pairs always top the table for their trading volumes as they have US Dollar on one side.
As you are clear about the major currency pairs in Forex, let’s discuss what the Exotic pairs in Forex are:
Exotic pairs in Forex have mostly a currency of an emerging market on one side (as a base or counter currency). So, in this category of currency pairs in Forex, we will have significant currencies, crossing currencies of developing countries like Mexico, South Africa, and Turkey.
Let’s glance at some popular and best Exotic currency pairs to trade in Forex:
What Are Highly Traded Exotic Pairs?
EUR/TRY (Euro/Turkish Lira)
Banks and companies prefer exchanging Turkish Lira, as Turkey is trying to enter the European Union, its largest trading partner. That increases the trading volume of this currency pair, making it attractive for traders. Similarly, the Turkish Lira (TRY) has been a highly volatile currency due to several economic crises and Turkey’s economic reforms in 2005.
AUD/MXN (Australian Dollar/Mexican Peso)
The seasonal changes in commodity prices and other economic factors make this currency pair highly volatile and attractive for global Forex traders.
The Australian Dollar (AUD) is a commodity currency. It is the third-largest traded currency. Similarly, Mexico focuses on exports, and its economy is the 15th largest in the world. This pair shows expanding economic and international trade attributes.
USD/ZAR (US Dollar/South African Rand)
The South African economy relies on commodity exports, mainly gold, and exports from other sectors like agriculture and automotive. As commodities like gold and diamonds are denominated in the US Dollars, USD/ZAR becomes an interesting Exotic currency pair to trade.
The South African Rand (ZAR) is a legal tender in the Common Monetary Area, including South Africa, Lesotho, Namibia, and Swaziland. South Africa is the 31st largest economy for GDP. It has a diversified industrial sector and excellent infrastructure.
EUR/HUF (Euro/ Hungarian Forint)
Hungary has had Forint (HUF) as its official currency since 1946 and has not yet adopted Euro. The Exotic pair is prone to volatility. It has shown bullish tendencies in recent times. So, it attracts Forex traders.
USD/INR (US Dollar/ Indian Rupee)
The changes in exchange rates of the Indian Rupee can be speculated based on factors like the US Dollar exchange rate, oil prices, Fed rates, and Indian economic data - such as the fiscal deficit, export-import data, and the PMI. That’s why the Exotic pair attracts traders.
India has emerged as the 5th largest economy in terms of GDP. It has strong trading relations with the US, and its massive oil imports are mainly settled in US Dollars. Though the US Dollar is improving, the Indian Rupee is also performing well.
USD/BRL (US Dollar/ Brazilian Real)
This Exotic pair shows expanding trade balance as the Brazilian economy is growing. Though Brazil doesn’t rely on the US much for exports, the Exotic pair gains volatility as the local traders intervene during the New York trading window. That’s why this Exotic pair becomes attractive.
Brazil is the 10th largest economy in terms of GDP and is in the 8th position for Purchase Power Parity. As the exports of commodities (Especially since the Russia-Ukraine conflict) and agricultural products have grown, the currency is stabilized and rising.
Similarly, the falling unemployment rate helps strengthen the currency against the US Dollar. So, it is a preferred Exotic pair in Forex.
What is Volatility? How Does it Relate to Returns in the Forex Market?
In the Forex market, volatility implies big swings in exchange rate movements in both directions. Volatility is the statistical measure indicating the deviation of exchange rate movement from the average. So, volatility represents how significant a currency pair’s swing is from its mean value.
Let’s quickly analyze why Exotic pairs are more volatile than major Forex pairs. Forex enthusiasts must understand that these currency pairs do not possess the liquidity as the major currency pairs. They lack market depth. Similarly, they are traded at a lower volume from time to time.
Thus, you can expect frequent ups and downs in the exchange rates of Exotic pairs due to several influencing factors. That makes the exchange rate more unpredictable and these assets more riskier. High volatility widens the spreads and thus directly impacts the returns or profit potential.
Most Exotic pairs are more volatile than major currency pairs from time to time. They allow big price moves. A recent example can be the price movements of EUR/TRY (Euro/Turkish Lira) in May 2023, as the victory of Erdogan in the Turkish elections kept the Exotic pair fluctuating.
Exotic pairs provide opportunities to earn a carry or interest rate. GBP/INR has performed well during the last decade. Yet, you can notice a tug of war when following USD/INR.
So, can trading Exotic currency pairs be more profitable than the major pairs? Wait! Planning and executing winning trading strategies for Exotic pairs requires in-depth due diligence, proper analysis, and a lot of patience. Therefore, obtaining historical and real-time Forex data from a reputed market data provider is critical.
Pros and Cons of Trading Exotic Pairs
Possibility of Better Returns
Exotic pairs may bring better returns in the long run, as they may progress considerably with time. Experienced analysts and traders draw trading strategies based on historical data and current trends to make their trading journey smoother and more fruitful.
Experienced traders combine technical analysis based on historical Forex data and analysis of the current exchange rate fluctuations, the influence of economic news, geopolitical elements, and the release of financial data to draw a realistic picture.
Higher Interest Rates
Usually, central banks of developing countries keep the interest rates higher than developed economies. Experienced traders may make the most of this gap in interest rates to gain while trading Exotic pairs.
Suitable for Long-term Investments
Geopolitical and economic elements may impact the exchange rates of these currency pairs. The effect may remain for a long time.
Sometimes, exchange rates of Exotic pairs in Forex may drastically shift. Price movements may be faster than you expect. Therefore, the high volatility may lead to many risks. Due diligence is therefore crucial before trading Exotic pairs in the live environment.
Exotic pairs trade at a low trading volume from time to time. Therefore, these instruments have less liquidity. Please note that less liquidity may lead to a trap making it difficult for traders to get out of trades.
Low liquidity may lead to significant financial losses in times of high volatility. Traders may need extensive holding capacity to wait till a favorable situation arises.
Mitigating risks while trading Exotic pairs is crucial to avoid future surprises due to sudden shifts in the exchange rates. Traders and analyzers consider risks and rectify them to counter high volatility and low liquidity.
Why is Reliable Forex Data Critical for Exotic FX?
As discussed, Exotic pairs trade at a low trading volume from time to time. So, they may have a lot of variance in reporting across data sources. That makes a reliable source of Forex data additionally critical.
You must rely on a market data vendor like us to ensure informed trading verdicts based on concrete technical analysis. We aggregate the Forex price feed sourcing it from reputable banks, institutions, and broker-dealer networks. That is why you can have an unbiased and clear picture of the price movements from us.
Rely on Us for Exotic Pairs Market Data
TraderMade has been a globally recognized vendor of accurate, reliable, and best-quality Forex Data for over 30 years. We cover Exotic pairs in Forex to help you get an unbiased, low-latency price feed in real-time via varied data delivery methods, like REST API, WebSockets, and SocketIO. Start obtaining market data from us today!
We provide 1000 monthly API requests for free and offer well-thought, flexible data subscription plans. Empower your Exotic currency pairs trading decisions and digital solutions like apps and websites by integrating our Forex API.