Forex Exotic Currency Pairs
Exotic currency pairs may not offer the same liquidity as major or minor pairs but their volatility can present opportunities if the fluctuations work in your favour. Read our in-depth guide for further information on examples of exotic currency pairs, the pros and cons of adding them to your portfolio and how to trade them.
Exotic currency pairs: What to expect from our guide
- What are exotic currency pairs?
- How are exotic currency pairs different from major and minor pairs?
- How do exotic currency pairs work?
- Examples of exotic currency pairs
- What affects the prices of exotic currency pairs?
- What are the advantages of trading exotic currency pairs?
- What are the risks of trading exotic currency pairs?
- How to trade exotic currency pairs with Tradu
What are exotic currency pairs?
An exotic currency pair is one which combines one major currency – such as the US dollar (USD), euro (EUR) or Japanese yen (JPY) – and a currency from a developing or emerging economy. Examples of exotic currencies are the Mexican peso (MXN), the South African rand (ZAR) or the Norwegian krone (NOK). Even though the daily average turnover of some exotic currency pairs amounts to tens of billions of dollars, they are traded much less frequently than major pairs such as USD/EUR or USD/JPY, whose daily amounts exceed $1 trillion.
How are exotic currency pairs different from major and minor pairs?
We’ve summarised the key differences between major, minor and exotic currency pairs in the table below:
SwipeFind out more about major and minor currency pairs in our related guides:
The difference between major and minor currency pairs
How do exotic currency pairs work?
The fundamental concept of an exotic currency pair is the same as any other pair on the forex market. It displays how much of one currency (the quote) is required to purchase one unit of another (the base). If we take USD/ZAR, for example, the dollar is the base currency and the rand is the quote currency.
The value of one half of an exotic currency pair is given in relation to the other half so, if one of the currencies experiences a shift in price, that will be reflected in the quote for that pair.
Examples of exotic currency pairs
The list of exotic currency pairs is extensive – here are just three examples of those that are among the most frequently traded:
- USD/MXN: The USD/MXN pair is often impacted by oil prices, with both countries among the world’s top producers of that commodity. As neighbours they enjoy close trade relations and, as of 2020, Mexico was sending almost 80% of its exports to the States.
- EUR/NOK: As a member of the European Economic Area but not the European Union, Norway and its krone enjoys an intriguing relationship with the euro. Norges Bank, the nation’s central bank, increased interest rates in May 2023, which caused the NOK to weaken before it recovered some ground.
- JPY/ZAR: The Japanese yen is a traditionally stable currency – often referred to as a safe haven. Meanwhile, the rand is more volatile and its performance tends to be sensitive to the commodities market. According to 2022 data from the Bank for International Settlements, JPY/ZAR’s average daily turnover stood at £5 billion – representing just 0.1% of all global trades.
What affects the prices of exotic currency pairs?
The performance of any exotic currency pair can be impacted by a number of different factors, which you will need to monitor in order to shape your fundamental analysis. Key indicators include:
- Economic data: Imports and exports, retail sales, GDP and inflation rates are all important metrics that point to the health of a nation’s economy.
- Monetary policy: Releases from central banks are closely monitored by traders as any updates on interest rates and other fiscal policies can have a significant impact on a currency’s value.
- Political developments: Wars, elections, scandals and trade agreements or disputes can cause price movements that create opportunities in the market.
- Extreme weather events: Storms, earthquakes and other natural disasters can have a major impact on a country’s economy – especially those who rely heavily on exporting agricultural commodities.
What are the advantages of trading exotic currency pairs?
- Trade both ways: You can trade exotic currency pairs via derivative products like contracts for difference (CFDs). Using derivatives means speculating on the price movement of an asset, rather than taking ownership of the asset itself. You can predict a pair’s value to move in either direction, earning a profit if your assertion proves correct.
- Leverage: When you trade using leverage, you’ll gain exposure to larger positions while only putting up a percentage of the capital. This can provide the opportunity to magnify your profits.
- Volatility: Exotic currency pairs are typically the most volatile in the forex market. This offers the potential to earn significant profits, if the price fluctuations are in your favour.
- Diversification: Including exotic currency pairs in your portfolio can act as a risk-management strategy, as diversifying can help to hedge against other positions that you may have taken up.
What are the risks of trading exotic currency pairs?
- Leverage: While leverage can magnify your profits, it can also magnify your losses. You are exposed for the full value of your position, not just your initial outlay, so there is always the risk of losing more capital than you originally put up to open a position.
- Volatility: The heightened volatility of exotic currency pairs brings inherent risk, too. If the market moves against you suddenly, you could incur significant losses.
- Liquidity: Exotic pairs are not traded in such high volumes so are a lot less liquid than major and minors. This can make it more difficult to find a buyer or seller for your trade when you need to do so.
- News coverage: The emerging markets and economies linked to exotic currencies do not attract quite as much press attention, which makes it harder to conduct detailed fundamental analysis.
- Spreads: Exotic currency pairs have much wider spreads than major or minor pairs, and this will increase the cost of your trading.
How to trade exotic currency pairs with Tradu
You can trade exotic currency pairs via our proprietary platform, which offers access to the forex market plus a range of analytical tools and software to help you to implement your strategy. Open your account in a matter of minutes or check out our related guides for further reading.