Exotic Currency: What it Means, How it Works

Examples of the most popular forex minors are the EUR/GBP, AUD/NZD, AUD/GBP, EUR/JPY, and GBP/SEK. The forex market is the biggest industry in the financial market, with trillions of dollars being traded on any given day. It is significantly bigger than the stock, commodities, and bond markets.

The British Pound Sterling (GBP) and the United States Dollar are one of the major Forex pairs. Not only does this mean the amount of each one that exchanges hands regularly, but it is also because both countries have close economic relations. The prices of these “majors” will also be leveraged against each other since the pound is traditionally higher than the dollar. Currency pairs are quoted based on their bid (buy) and ask prices (sell).

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Exotic currency crosses, also known as exotic currency pairs, refer to currency pairs that involve the currencies of emerging or less frequently traded economies. Exotic currency pairs, in the context of foreign exchange (forex) trading, refer to currency pairs that involve the currencies of emerging or less frequently traded economies. These pairs are considered multiprocessing vs threading in python less liquid and have lower trading volumes compared to major currency pairs. A benefit to trading exotic pairs is that they may offer higher potential returns due to wide price fluctuations. However, this means that trading an exotic currency pair is usually riskier as it has high market volatility and in some cases, heavy involvement from central banks.

  • The small position that it occupies in your portfolio could be a major contributor to investment profits.
  • —New Zealand Dollar– New Zealand is the 52nd largest economy in the world.
  • Conversely, when trading commodities or stocks, you’re using cash to buy a unit of that commodity or a number of shares of a particular stock.

Since exotic currencies are typically issued by emerging or frontier market countries, political risks are elevated. This includes the risk of exchange rate control or other unorthodox monetary policies, which can lead to currency depreciation. The plight of a major currency will depend on the health of its economy and the interest rate differential, while exotic currencies will often move on changes in the political landscape. In times of political instability, an exotic currency will depreciate at a rapid rate.

What are the most volatile exotic forex pairs?

We look at what exotic currencies are, what the risks are when dealing in such currency pairs and how to hedge these risks. Exotic currency pairs bring more risk thanks to their volatility, their illiquidity, and the turbulent political situations in many of their home countries. This 12trader forex broker review means that you need to be extra diligent about your risk management strategies. Talking about the exotic pair, any pair that is not major or minor can be considered exotic. When we refer to exotic pairs, it is more about how popular the pair is and not how developed or advanced it is.

The Crosses or The Minors Currency Pairs

Exotic forex pairs consist of a primary currency paired with one from an emerging or smaller economy. These usually carry more risk and higher transaction costs due to their low liquidity. Exotic currencies are not as widely ironfx forex broker review traded as major currencies, so their prices can be more volatile than major currency pairs. Some examples of exotic currency pairs include EUR/TRY (Turkish lira), USD/SGD (Singapore dollar), and GBP/NOK (Norwegian krone).

Should the country begin to stabilize, around the time of a major spike in oil prices, it can provide such returns. This be particularly likely in the event of a significant disruption of the flow of oil. For example, should the supply of oil flowing out of the Persian Gulf be restricted for an extended period of time, the price of oil could explode. Iraq’s financial position would immediately improve, as well as its strategic value to the Western nations. We certainly don’t want to paint an overly optimistic view of the profit potential of exotic currencies, and particularly of any specific one.

Advantages of Trading Exotic Forex Pairs

Learn more to see if these volatile, illiquid pairs might be right for you. This is one of the most popular USD-based exotic pairs as the two respective countries underpinning the currencies have frequent trade relations. Exotics are thinly-traded currencies from so-called developing countries or emerging economies. On the other hand, many brokers suggest that a little long trade would benefit more – it can be a swing trade or a carry trade. As a trader, you should know that you will need wider spreads in exotic forex trading, increasing your risk, fees, and capital requirement to enter the trade.

—Australian Dollar-AUD or Australian Dollar is the official currency of Australia. AUD is at the other end of 6.5% of all forex trading transaction daily. The other name for Minor currencies is Commodity Currencies or Com Dollars.

How to trade exotic forex pairs

So, technically, an exotic currency forms part of an exotic pair, an instrument consisting of this currency paired against a more dominant market like USD, EUR, GBP, etc. But the portion held in your alternatives IRA should also include a healthy mix of gold and silver, and even real estate. For example, if the IRA holds 20% of your total portfolio, you might devote 25% of that account – or 5% of your total investment portfolio – to exotic currencies. Since exotic currencies are a true long-term investment, one of the best ways to hold them is in an IRA. The account can be used to hold gold, silver, and even real estate, in addition to your currency positions. These are what are often known as “hard currencies”, because they have recognized values.

That is also the brokers’ option; brokers rarely offer two exotic currencies in a pair. As a result, you may notice a currency of developing nations trading against the developed nation’s currencies. The best exotic currency pairs are the fx pairs with strong bullish or bearish trend potential in the current trading period. If traders see a clear trend direction and increased volatility, there are opportunities for a trend-following system for that exotic currency pair. Finally, there’s also the availability issue regarding these two types of currency pairs. At the same time, most brokers offer access to all major forex pairs; some may not provide access or offer limited access to exotic pairs.

Unlike traditional cryptocurrencies requiring intensive computational… Hantec Markets does not offer its services to residents of certain jurisdictions including USA, Iran, Myanmar and North Korea. The products and services described herein may not be available in all countries and jurisdictions.

The same idea alluded to above about the Australian dollar is also used when trading the NZD against the US dollar. Exotic currencies are not particularly attractive for markets, and the quantities exchanged for exotic pairs appear to be small. Owing to low trade volumes, trade exotic currencies lack liquidity and active strategy. Minor currencies, also referred to as cross currencies, are currencies that are not considered major but are still actively traded in the forex market.

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