Trading Exotic Currencies
A Wealth of Knowledge
Obviously in the Forex market, we trade currencies. It is important to know that those currencies are classified/categorized into different groups from: Major pairs, to Crosses and lastly to Exotic pairs. Exotic pairs are those pairs which are the least traded in all of the Forex market. This is to say that exotic currency pairs are not as liquid as the major or cross currencies. This is due to the lack of popularity as such they tend to be costly to trade as there aren't too many traders trading the pairs which calls for higher spreads.
A List of exotic currencies
Below is a table of all the exotic currency pairs, but due to the fact that currencies are largely influenced by economic and sociopolitical factors. With this being said thereof, the list may change over time.
|AED||UAE Dirham||ARS||Argentinean Peso||BRL||Brazilian Real|
|CLP||Chilean Peso||CNY||Chinese Yuan Renminbi||CZK||Czech Koruna|
|EGP||Egyptian Pound||HKD||Hong Kong Dollar||HUF||Hungarian Forint|
|IDR||Indonesian Rupiah||ILS||Israeli Shekel||HUF||Indian Rupee|
|IRR||Iranian Rial||ISK||Icelandic Krona||JOD||Jordanian Dinar|
|KRW||South Korean Won||KWD||Kuwaiti Dinar||MXN||Mexican Peso|
|MYR||Malay Ringgit||PHP||Philippine Peso||PKR||Pakistani Rupee|
|PLN||Polish Zloty||RUB||Russian Ruble||SAR||Saudi Arabian Riyal|
|SGD||Singaporean Dollar||THB||Thai Baht||TRY||New Turkish Lira|
|TWD||Taiwanese Dollar||ZAR||South African Rand||ZWD||Zimbabwe Dollar|
These are all the least traded currency pairs as such, the all show or indicate characteristics of limited trading interests, from higher spreads as compared to both the major and cross currency pairs. Although this might be the case, it is as important to understand that exotic currencies aren't necessarily weak currencies. However they are not as widely traded as many other pairs, as such they have the least market interest as compared to the Major pairs such as EUR/USD which is the most traded pair. To further illustrate this point, let us examine both the KWD (Kuwait Dinar) and AED (Saudi Arabian Riyal) are both highly valued in general however, are categorized as exotic due to the least amount of trading interest associated with these currencies.
The downside of trading exotic currencies
- As already explained above, exotic pairs are the least traded pairs in all of the Forex market, this low liquidity makes it somewhat difficult to trade these pairs as the transactions are normally facilitated based on on the bank's predetermined rates for remittance.
- As these pairs are not traded as the others, this calls for high spreads and higher markup fees which then eat up on the profits one would have stood to make in a case whereby the trades are profitable.
- One of the main reasons why exotic currencies are not traded as much is because of their instability over the long term, which is as a result of sociopolitical factors. As such, these developments lead to big currency moves and this makes it almost impossible even for traders with experience to trade given such conditions. As an example of this, one may take the instance on USD/RUB when it moved from 33.5 to 39 it a short period of time (from July-September 2014.
- Due to the unpopularity of these currencies, it is much harder to track macroeconomic factors that determine the supply and demand of such currencies. This then translates to heightened risk.
The upside of trading exotic currencies
Moreover, it is not only bad, there are also upsides/or rewards that come with trading these pairs. These currencies also tend to be very volatile which results in high value moves in a relatively short period of time which then translates high returns.
- Say one caught the move of the above mentioned happenstance of the USD/RUB (United States Dollar/Russian Ruble) when it moved from 33.5 to 39.0 in less than 3 months. In this case one would have gained a profit of about 16% and even more factoring in the leverage.
- Over a longer period the move is even better, take for instance the exchange of the USD/IRN. In 2008 it went from 39 to 69 within a period of 4 years, this would've meant that one has made a 77% of profit.
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