Interesting exotic currency pairs for forex traders
There are 3 types of currency pairs in the forex: major pairs, minor pairs and exotic pairs.
The major currency pairs usually include the US dollar as the base or quote currency, and among these pairs the "biggest" pairs are the GBP/USD, the EUR/USD and the USD/JPY. They are the most traded and are therefore very liquid.
Minor currency pairs include the EUR/GBP, the GBP/JPY and the NZD/JPY. These pairs don't feature the USD dollar, but the most commonly traded pairs will feature other major currencies such as the EUR, the GBP and the AUD.
The third and last category are the exotic pairs. Here, the US dollar is usually associated with the currency of an emerging economy that is rarely traded against other major currencies. Exotic pairs include the USD/TRY (US dollar/Turkish lira) and the USD/MXN (US dollar/Mexican peso).
The lack of liquidity in these markets makes these pairs tend to have a larger spread (difference between the bid and ask price). However, high interest rate spreads and frequent price fluctuations mean that these pairs generally offer great profit opportunities. Although these exotic currency pairs entail a slightly higher risk, typically only the more experienced traders will trade them.
Beyond the USD/MXN and USD/RUB - which are two major and well-known exotic currency pairs - there are plenty of other currency pairs that also offer similar opportunities.
Below, we will briefly examine a few exotic pairs that many forex traders currently trade.
Euro / Turkish lira (EUR/TRY)
The euro is the single currency adopted by 19 EU member countries. It is also the base currency of this currency pair. This means that if the value of EUR/TRY exchange rate is 8.6400, you would need 8.6400 Turkish liras to buy 1 euro. The euro is one of the most traded currencies in the world, second only to the USD. It is influenced by the geopolitical situation of the EU and its trading partners, by the monetary policy of the Central Bank of Europe (ECB) and by other important data such as inflation, manufacturing data, and consumer demand in Europe.
The Turkish lira (TRY) is used in Turkey as well as in the Turkish portion of Northern Cyprus. Once considered one of the least valuable currencies in the world, the TRY only came to life (the "new" Turkish lira) after a wave of economic reforms in 2006. However, a major debt crisis, a somewhat mediocre president and the country's current account deficit led to its devaluation of nearly 45% against the US dollar in 2019.
Nonetheless, Turkey is considered to be one of the largest emerging economies. More than 45% of its exports go to the EU, in particular Spain. Turkey is also a major exporter of cars. Forex traders were initially drawn to this pair due to the highly volatile pre-crisis conditions. However, this volatility has decreased in recent times due to Europe's strong monetary policy, which aims to maintain price stability there.
US dollar / Thailand's baht (USD/THB)
The USD/THB currency pair performed very well in 2020, despite an environment marked by deteriorating relations between China and the United States due to the trade war and the Coronavirus epidemic. According to a 2020 Bloomberg report, the Thai baht is one of the few emerging economy currencies that has reacted less to the Chinese economic slowdown. This has made the USD/THB a safe haven, whenever there is an escalation in the trade clashes between China and the US.
Low-yield Thai bonds, along with the large current account surplus and large foreign exchange reserves have helped to increase the value of the baht in the currency market. Thailand is another important emerging economy, with a strong export market. It is Asia's seventh-largest economy, and boasts very low unemployment. Thailand's exports include electronics, machinery, and timber; its trading partners are the United States, China, Hong Kong, and Japan. The Bank of Thailand's monetary policy has a strong influence on the THB and therefore the USD/THB currency pair.
British pound / South African rand (GBP/ZAR)
The price of the British pound/South African rand (GBP/ZAR) currency pair largely depends on the Bank of England's interest rate decisions. A cut in interest rates by the UK central bank can generate high volatility. The 2017 Brexit referendum helped sink the currency pair to its lowest level since 2012.
In the early years, the value of the rand was closely tied to the price of gold, South Africa's largest export. However, during the 2009 financial crisis, it lost over 45% against the USD.
Its correlation with the price of gold still exists. The mining of gold and platinum is one of the main income generators in South Africa, along with agriculture. However, these two sectors remain marked by political uncertainties and weather-related problems.
Currently, South Africa has a thriving banking sector and manufacturing industry. The automotive industry represents 9.5% of its exports.
GBP/ZAR traders should remain vigilant for the country's unemployment rate, which is currently one of the highest in the world, at around 25%. The South Africa Reserve Bank (SARB), the nation's central bank, focuses on two main issues: the high inflation rate and unemployment.
Australian dollar / Mexican peso (AUD/MXN)
Another major exotic pair offering good opportunities is the AUD/MXN. The Aussie dollar is a currency linked to commodity markets and is extremely volatile. Indeed, Australia is a major exporter of iron ore, beef, petroleum, gold and many other commodities. Seasonal fluctuations in the price of these products also affect the AUD.
Currently, due to the high interest rate differential between the two currencies, the pair is often used for carry trade, although the AUD/JPY currency pair has a larger carry trade volume. The Reserve Bank of Australia (RBA) is in charge of the country's monetary policy and its decisions have a strong impact on the Aussie dollar.
The Mexican economy is the fourteenth largest in the world in terms of nominal GDP. It is an economy that relies heavily on exports. Over 85% of its trade is carried out under free trade agreements with around 45 countries such as the EU, Japan, Israel, Canada and the United States. Forex traders closely follow trade-related events and reports, such as tariff wars, supply chain disruptions, or events related to NAFTA (North American Free Trade Agreement), in order to measure the direction of the peso's price. The agricultural and industrial sectors both contribute to its exports, as does petroleum, and can therefore have a significant effect on the MXN.
Japanese yen / Norwegian crown (JPY/NOK)
Although unfamiliar to most traders, the JPY/NOK is another interesting currency pair. The Japanese yen's low cost of borrowing, due to its low interest rate, which has seen 0 and even negative figures, makes the currency popular with equity and commodity traders around the world. It is also a safe haven currency when trading with the US dollar, and it is very popular in times of political and economic uncertainty like the recent worldwide virus situation. The yen is also a very popular carry trade currency.
As for the Norwegian economy, it's heavily dependent on oil exports. When the price of oil rises, the krona strengthens against other currencies and vice versa. Norway is also a major exporter of metals, fish products and chemicals, and it sells to countries like Germany, France, UK, and the US. Due to its proximity and reliance on North Sea oil, forex traders have found that there is often a strong currency correlation between the GBP and NOK.
Conclusion
Exotic currencies should be traded with much attention paid to risk management as they don't have the same market depth and liquidity as other currency pairs, especially the larger ones. The political and economic instability of these emerging nations also makes them extremely volatile. Their high volatility, especially during major geopolitical events, means that trading these pairs carries a level of risk that only experienced traders should attempt.
Before trading the above-mentioned exotic pairs, you should ensure that you know which currency pairs are best for your trading style, how these pairs typically react, and what factors and market events can cause the most violent fluctuations in their exchange rates and produce the most profit or loss.
If you are unsure of how to manage the risks associated with these currency pairs, it is best to initially limit yourself to non-exotic pairs such as the EUR/USD.
