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.
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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:
Swipe
A combination of the USD and one other major currency, such as EUR
or JPY.
A combination of two major currencies, but not including the USD.
A combination of one major currency and another from an emerging
market.
Linked to largely stable economies, so typically the least volatile
types of forex pairs.
More volatile than the majors but typically not as volatile as
exotic currency pairs.
Traditionally the most volatile type of forex pair, which can bring
benefits and risks in equal measure.
The most frequently traded pairs around the world, offering
extremely high liquidity.
Not as liquid as major pairs but still traded in high volume.
Illiquid in comparison to major and minor pairs, which can make it
difficult to enter/exit positions.
Tight, due to being traded in such high volume.
Wider than major pairs, which will increase your cost of trading.
Wider still, which can make them even more expensive to trade.
Extensive, as they involve nations whose economic updates attract
plenty of attention.
Extensive, as they involve nations whose economic updates attract
plenty of attention.
Less extensive, meaning that analysis of the emerging markets
requires more time-consuming research.
Find out more about major and minor currency pairs in our related guides:
Major currency pairs
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:
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.
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